Let’s say, for the sake of argument, that you are intrigued by the 71% gains that MOS has logged in the past eight weeks in Portfolio A1, but for whatever reason do not want to own that particular stock. Perhaps you have an opinion that the fertilizer stocks are overbought or that a supercycle is just beginning in this sector. Which stocks should you be looking at? I recommend visits to three free web sites that can help you answer this and other related questions: Market Topology; Sector SPDR Correlation Tracker; and DeepMarket.com’s correlation tool. Each of these sites has some particular strengths that I discuss below.
My first stop to evaluate correlation data is usually at MarketTopology.com. Once there, you need to click on the Equities Markets:
Among the three sites discussed here, the ease of use award would probably go to the Sector SPDR Correlation Tracker, which simply asks for a ticker and generates three lists: highest correlation sector SPDRs; highest correlation stocks/ETFs; and lowest correlation stocks/ETFs. As an added bonus, you can generate java comparison charts for any four securities on these lists for additional analysis. Let’s say you are interested in the FXI, but prefer to take a position in an individual stock instead of the ETF. Using the Sector SPDR correlation tracker, you would be pointed in the direction of CHL, CEO, LFC, and BIDU.
At the bottom of the list is DeepMarket.com, which scores high for content, but low for aesthetics. Their correlation tracking tool lists the top 5 highest positive correlations and (lowest) negative correlations for the past 10, 30, 100, and 200 day trading periods. The site provides the correlation coefficient and a rudimentary line chart, but little else. What I do like is the ability to slice and dice correlations over four different time periods (the longer time periods probably provide the most value,) but apart from that feature, the other two sites are to be preferred.
I should mention that while I have focused on positive correlations here, each site provides a list of the most extreme negative correlations as well. While these generally are not as strong correlations as the positive correlations, they do provide and excellent jumping off point for someone looking to add securities to a portfolio that may be inversely correlated to some of the portfolio’s riskier holdings. This type of approach is admittedly more art than science at the individual security level, but for those unable to evaluate portfolio level correlation data, it is a substitute worth exploring.