Trader’s Narrative

Here are two free online tools that analyse the relationship between stocks and help you to find correlated stocks (or negatively correlated stocks):

Select Sector SPDR Correlation Tracker

Any quantjock worth his salt will laugh at such a simplistic treatment of correlation but for the rest of us it is a useful tool. How useful is it and why would you want that kind of information in the first place?

Knowing the correlation of one stock to another helps you in define your portfolio. After all, what good is owning separate stocks or even ETFs if most of them are correlated? If you don’t diversifying your holdings you are at risk that a market shock will effect them all at once and in the same way.

Another reason to look for correlated stocks is to engage in pair trading. This is where you aren’t interested in a stock per se but the relationship between two stocks. There are different strategies but the simplest is to watch the relationship and when it gets out of historical norms, to go long one and short the other.

Another online resource is Market Topology, now renamed: Impactopia.

They offer more robust analysis with a choice of time frames as well as the ability to graph the spread of two stocks or each, side by side. To use the site you may find it asks you to sign up but the service is free.

Impactopia has other goodies if you explore enough. For example, it plots a “tree” of the security you are curious about mapping out its relationship with other securities. You can see Google’s (GOOG) tree to above.