How to Pick Stocks With Low Correlation to the Broader Market?

10 minutes read

When it comes to picking stocks with low correlation to the broader market, there are a few strategies that investors can consider. These strategies aim to identify stocks that demonstrate a lower dependency on market conditions and could potentially perform well even during economic downturns. Some approaches to consider include:

  1. Sector diversification: Investing in stocks that belong to different sectors can help reduce correlation with the broader market. This involves spreading your investments across sectors such as technology, healthcare, consumer goods, etc. as different sectors may react differently to market conditions.
  2. Dividend-paying stocks: Companies that pay consistent dividends tend to be more defensive and less influenced by market fluctuations. These stocks often belong to established companies with stable earnings and can provide a steady income stream even during market downturns.
  3. Analyzing historical data: Reviewing a stock's historical price movements and correlation with the market can provide insights into its behavior during different market conditions. If a stock historically exhibits low correlation with the broader market, it may indicate a higher likelihood of continuing to do so in the future.
  4. Fundamental analysis: Evaluating a stock's fundamental factors, such as revenue, earnings growth, debt levels, competitive advantage, and management quality, can help identify stocks that have a stronger likelihood of performing well irrespective of broader market movements.
  5. Alternative investments: Consider diversifying your portfolio with alternative investments such as real estate, commodities, or bonds. The performance of these assets doesn't always closely align with the stock market, providing a potential source of low correlation.
  6. International exposure: Investing in international stocks or funds can introduce additional diversification benefits. Different economies may have different market dynamics and react differently to global events, leading to potentially lower correlation with the broader market.

While these strategies can help in picking stocks with lower correlation to the broader market, it's important to note that there are no guarantees. Correlations can change over time, and thorough research and analysis are necessary to increase the likelihood of achieving the desired outcomes.

Best Websites for Intraday Trading Analysis in 2024


Rating is 5 out of 5



Rating is 4.9 out of 5



Rating is 4.8 out of 5


Yahoo Finance

Rating is 4.7 out of 5

Yahoo Finance

How to analyze a stock's price volatility to assess correlation?

To analyze a stock's price volatility and assess correlation, you can follow these steps:

  1. Obtain historical price data: Gather the historical price data of the stock you wish to analyze. This data can often be obtained from financial websites or through specialized financial data providers.
  2. Calculate daily returns: Calculate the daily returns of the stock by dividing the change in price from one day to the next by the price on the previous day. This will give you a series of daily returns for the stock.
  3. Measure volatility: Calculate the stock's volatility by using a measure such as standard deviation or average true range (ATR). Standard deviation evaluates how much the stock's returns deviate from their average, while ATR measures the average range between high and low prices over a given period. Higher volatility implies greater price fluctuation.
  4. Identify correlation: Choose another variable or asset class that you want to assess the stock's correlation with. It could be another stock, an index, or any other relevant variable. Collect the historical data for this variable as well.
  5. Calculate correlation coefficient: Use statistical techniques such as correlation coefficient calculation to measure the relationship between the stock's daily returns and the returns of the other chosen variable. The correlation coefficient ranges between -1 and +1. A positive value indicates a positive correlation, negative indicates a negative correlation, and values close to zero represent minimal correlation.
  6. Analyze the correlation: Interpret the correlation coefficient to understand the relationship between the stock and the chosen variable. A high positive correlation suggests the stock's price movement aligns strongly with the variable, while a high negative correlation indicates an inverse relationship. A correlation near zero suggests little to no relationship.
  7. Consider time frames and sample size: Keep in mind that correlation can vary based on different time frames and sample sizes. Analyzing multiple time frames or longer periods can provide a more robust understanding of the stock's correlation.

Remember that correlation does not imply causation, and other factors such as market conditions, industry trends, and company-specific news can impact stock prices. Therefore, it's important to consider multiple factors when making investment decisions.

What is the significance of low correlation in stock picking?

Low correlation among stocks is significant in stock picking because it can help to diversify a portfolio and reduce risk.

When stocks have a low correlation, they tend to move independently of each other. This means that if one stock in a portfolio is performing poorly, there is a lower chance that other stocks in the portfolio will also be performing poorly at the same time. Conversely, if one stock is performing well, it is less likely that other stocks will also be performing well.

By having a diversified portfolio with low correlation stocks, an investor can potentially reduce the overall volatility of their portfolio. This is because the losses from some stocks may be offset by gains in others, resulting in a more stable overall return.

Furthermore, low correlation can provide more opportunities for potential gains. If an investor is able to identify and pick stocks with low correlation, they may be able to capture different trends and profit from a variety of market movements.

In summary, low correlation is significant in stock picking as it helps to diversify a portfolio, reduce risk, and potentially enhance returns by capturing a range of market movements.

How to select stocks from different sectors to lower market correlation?

To lower market correlation and diversify your stock portfolio, you can follow these steps for selecting stocks from different sectors:

  1. Study and understand different sectors: Start by researching and gaining knowledge about various sectors, such as technology, healthcare, finance, consumer goods, energy, etc. Understand the characteristics, trends, and risks associated with each sector.
  2. Analyze sector performance: Evaluate the past performance of different sectors, considering factors like growth rate, volatility, and historical correlations with the overall market. Look for sectors that have shown relatively low or negative correlations with each other.
  3. Identify sectors with potential: Identify sectors that have promising future prospects and potential for growth. Look for sectors that are expected to benefit from trends, innovation, government policies, or changing consumer preferences.
  4. Diversify across sectors: Allocate your investment across different sectors. Aim for an equal or proportional distribution of your investment in various sectors to reduce the impact of one particular sector's performance on your overall portfolio. This diversification helps lower the correlation among your stocks.
  5. Consider fundamental analysis: Perform fundamental analysis on individual stocks within each sector. Analyze factors such as financial health, earnings growth, market share, competitive position, and company management. Select stocks that demonstrate strong fundamentals and have growth potential.
  6. Review stock correlation: While selecting stocks, examine the historical correlation between each selected stock and the overall market. Choose stocks that have lower or negative correlations with the market, as they are more likely to provide diversification benefits.
  7. Monitor and rebalance: Regularly review and monitor the performance of your portfolio. If some sectors or stocks deviate significantly from their expected performance, consider rebalancing your portfolio. This involves selling overperforming stocks and investing the proceeds in underperforming sectors or stocks to maintain the desired diversification.
  8. Seek expert advice: If you find it challenging to identify and select stocks from different sectors, consider seeking advice from financial professionals, such as financial advisors or portfolio managers. They can provide guidance based on your risk tolerance, investment goals, and the current market conditions.

Remember, diversification does not guarantee profit or protect against losses, but it can potentially reduce overall risk by spreading your investments across different sectors and reducing the impact of market fluctuations on your portfolio.

How to screen for stocks with low correlation using online platforms?

There are several online platforms that offer screening tools to identify stocks with low correlation. Here is a general guide on how to use these platforms:

  1. Choose a reliable online platform: Select a reputable platform that provides screening tools for stocks. Some popular options include Finviz, StockCharts, and MarketWatch.
  2. Access the screening tool: Once you've chosen a platform, navigate to their screening tool or stock screener. This is usually located in the "Tools" or "Research" section of the website.
  3. Define your criteria: Specify the criteria to screen for stocks with low correlation. You may want to consider the following factors: Correlation threshold: Determine the maximum correlation level you are looking for. For example, you may set the threshold at 0.3, meaning you only want to include stocks with a correlation coefficient of 0.3 or lower. Timeframe: Decide the timeframe over which you want to analyze the correlation. Common options include 1 month, 3 months, 6 months, or 1 year. Other parameters: You can further refine the screening by setting criteria such as market capitalization, sector, industry, price, volume, or fundamental data.
  4. Run the screen: Input your defined criteria into the screening tool and run the screen. The platform will generate a list of stocks that meet your specifications.
  5. Analyze the results: Review the list of stocks generated by the screening tool. Pay attention to the correlation coefficients or any other relevant data provided by the platform. You can further investigate individual stocks to evaluate their suitability for your investment strategy.

Note: It's important to remember that correlation can change over time, and historical correlations may not predict future relationships. Additionally, thoroughly research and evaluate individual stocks before making any investment decisions.

Facebook Twitter LinkedIn Telegram Whatsapp Pocket

Related Posts:

Identifying stocks with low beta involves understanding what beta represents and using certain methods to find stocks that exhibit low volatility compared to the overall market. Beta is a measure of a stock's sensitivity to market movements. A value of les...
To pick stocks with low price-to-book (P/B) ratios, you need to consider several factors before making investment decisions. The P/B ratio compares a company's stock price with its book value per share, which represents its net assets per share. A low P/B ...
Picking stocks using the discounted cash flow (DCF) method is a popular approach for investors who value stocks based on their expected future cash flows. Here is a brief overview of how to use the DCF method to pick stocks:Understand the concept: The DCF meth...