Traders focus on correlations, not fundamentals

Traders.pngInvestors on Wall Street are no longer bothering with the boring detail of company performance.

That’s the conclusion from a new study by Barclays Capital, on the correlation between movements in the S&P 500 and individual stocks.

Instead, they are piling into the ‘correlation trade’, as high-speed computers now often account for over 60% of daily trading.

Until 2006, the daily correlation between stocks and the index was just 27%. It was only in exceptional circumstances, such as the Iraq War in 2003, that correlation rose to 60%.

Since then, correlation has become the name of the game. It was 80% at the height of the financial crisis, and again in Q2 during the European debt crisis. And it is still high today, at 74% in August and 60% today.

According to the Wall Street Journal, “such high correlation levels were seen previously only during the Great Depression”. The blog, not being a fan of correlation trading anyway, likes the sound of that parallel even less.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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