No matter what, every individual has a unique insight into an industry that is useful for investing for profit. If you are a shoe freak and see a certain brand selling well from Nike (NYSE: NKE) and know that those from Crocs (NASDAQ: CROX) are no longer the rage, then gains can be made from going long on Nike and going short on Crocs.
Insight like that can also result in profits from correlation investing, too.
What is Correlation Investing?
From Investopedia, “correlation” is defined: “In the world of finance, a statistical measure of how two securities move in relation to each other. Correlations are used in advanced portfolio management.” Correlation buying and selling has a role in every portfolio, no matter how advanced the investor.
As an example, if the price of oil rises, then the price of publicly-traded airline stocks will fall.
The reason for this is simple: fuel costs are more than 40 percent of an airline’s expenses. When the price of oil goes up, the share price for airlines stocks go down. For an easy correlation trade, investors could buy shares of the exchange-traded fund for oil, United States Oil (NYSE: USO), when the price of crude rises. At the same time, shares of the exchange-traded fund for the airline sector, Guggenheim Airlines (NYSE: FAA), could be shorted.
The same can be done with individual stocks in each sector, too, such as ExxonMobil (NYSE: XOM), Southwest Airlines (NYSE: LUV), Chevron (NYSE: CVX), United Continental (NYSE: UAL), and many others.
When going short, it is best to pick the weakest stock in the sector. It is the same with going long. Those are the ones that will benefit most from the prevailing trends in the industry group.
Exchange-traded funds such as United States Oil and Guggenheim Airlines offer the benefit of a wide range of assets. That diversity protects against the fluctuations that can result from the events of a single company. Professionals also do the research and buying and selling for exchange-traded funds, too.
How to Find Correlation Trades
There are a number of ways to utilize correlation investing to profit.
It is always a useful exercise for an investor to come up with their own ideas. That maximizes the skill set and knowledge base of every individual investor. For professional help, there are a number of excellent financial websites. Macroaxis has a correlation function. Although not having a specific correlation feature, Yahoo! Finance is a fine website, too, along with FINVIZ.
Macroaxis, Yahoo! Finance, and FINVIZ should be able to provide what is needed for the fundamental research and due diligence that should be a part of all investing.
But thinking it through is what is best for an individual investor. Bill Gates, the legendary founder of Microsoft and one of the richest men in the world, used to have “think weeks.” Those periods of time were for him to be alone. During that, he would refine and structure his thoughts on a wide range of issues.
Investors should do the same with correlation buying and selling.
FINVIZ, Macroaxis, and FINVIZ have much to offer, and so do social media sites for investing. But those should be utilized to help define the thought process for individual investors, not make the actual decisions. That is what will result in the greatest long-term profits from correlation investing.
Have you ever used correlation investing to make a profit in the stock market?