The Correlation Index is Worth Watching

I’ve mentioned in the past about the relationship between stocks and the market by looking at the correlation index ($JCJ).

This index tells more about the performance of individual stocks vs the market than any tool out there. With a low correlation to the stock market we see individual stocks move on their own merit without undue influence. Oh, sure commodities stocks will move with the underlying, crude was down sharply Friday and those ‘integrateds’, services and drillers all were lower, gold got hammered and the old ‘standby’ goldbug names were drilled.

While many have complained about not having an opportunity to get on board, did you know the market went absolutely NOWHERE this past week? See the chart below. Perhaps it’s a function of a low volatility environment (VIX under 13%), but some stocks are moving regardless of the markets.

But how is this market levitating so well for so long? Doesn’t anyone want to SELL? Is it that good of an environment for stocks? I’m not going to talk about p/e ratios, growth rates or even price multiples. My trade focus is on the charts and technicals, while my landscape analysis is on economic data, anecdotal and empirical evidence. So, as the time continues to pass the markets frustrate more and more people, but isn’t that what markets are supposed to do? As an option trader who follows trends and momentum, I will take my cues from what the market tells me – and right now it’s not a horrible message!

The need for instant gratification has never been more apparent, and many will take that to extremes, perhaps putting too much at risk to gain that reward. However, is that the right approach to achieve a goal? Fear and greed are the emotions that trigger the action of buy or sell decisions. When we are caught up in an emotional swirl it is because we fear the unknown but are fully aware of the consequences of not making the right decision to venture out or not. Trading is not a game of perfect, we have to accept that we will occasionally be wrong throughout the journey but believe that we will win in the end.

Lang Correlation .jpg

Bob Lang

Bob Lang, Senior Market Strategist and trades various option strategies for option trading newsletter Explosive Options