Diversification Won’t Help Much in This Market

All sectors are forging ahead, so trading the news on individual names is your best bet

   

As the Dow Jones Industrial Average continues to forge new all-time highs, the question on everyone’s mind is, “Which sectors are driving the market higher?”

Our answer: All of them.

We know that may seem like a strange answer, but it’s true. Let us explain.

Strong Positive Correlation Across the Board

36131 300x201 Diversification Wont Help Much in This MarketLooking back, the current uptrend began on Nov. 16, 2012. Since then, virtually every major sector in the market has moved higher and higher, in lock-step with each other. You can see this trend in the chart, where we have plotted the returns of the following exchange-traded funds (ETFs):

  • SPDR S&P 500 Fund (NYSE:SPY) – Black
  • Energy Select Sector SPDR Fund (NYSE:XLE) – Blue
  • Financial Select Sector SPDR Fund (NYSE:XLF) – Turquoise
  • Health Care Select Sector SPDR Fund (NYSE:XLV) – Bright Green
  • Industrial Select Sector SPDR Fund (NYSE:XLI) – Pink
  • Materials Select Sector SPDR Fund (NYSE:XLB) – Red
  • Technology Select Sector SPDR Fund (NYSE:XLK) – Blue/Gray
  • Utilities Select Sector SPDR Fund (NYSE:XLU) – Brown

As you can see, apart from a few positive divergences by XLK and XLB and a negative divergence by XLU, all of the sectors have been moving together.

This correlation of movement has become even more pronounced during market pullbacks – like we saw at the end of 2012 before the “fiscal cliff” deadline and at the end of February (highlighted by the red boxes).

So What Does This Tell Us?

It tells us that while there are certainly going to be some stocks that outperform and some stocks that underperform if the market continues to move higher, it is going to be pretty hard to choose investments that aren’t going to move higher on average in the near term.

It also tells us that if the market starts to correct lower, it is going to be quite difficult to find any stocks that don’t pull back with the rest of the market.

In other words, diversification is only going to do so much for us at this point because the market is moving as a whole.

The Bottom Line for Next Week

So what can you do in a market like this? We will continue to look for stocks that are moving with the rest of the market, but we also know that news announcements – especially earnings releases – are one catalyst that can cause an individual stock to break away from the herd in the short term.

John Jagerson and S. Wade Hansen are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news.  Get in on the next trade and get 1 free month today by clicking here.


Article printed from InvestorPlace Media, http://investorplace.com/247trader/diversification-wont-help-much-in-this-market/.

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