All stocks are correlated... or are they?

There has been a lot of talk recently about how all stocks are correlated and "stockpicking is dead" (see the Bloomberg article via FundmyMutualfund).

As I've mentioned before, I prefer stocks that are not in a major index because they seem to move more independently. I tested this by running some correlations myself. The tables show recent all-time highs vs. the indices SPY and IWM (small caps).

These are the main results for the all-time highs, which tend to be smaller stocks that aren't in an index:

• poorly correlated to SPY 
• most not closely correlated with IWM 

Obviously this is a small sample, but it suggests selective stock picking has value. For comparison I included GE, which has a huge market cap and is in the SPY (but not in IWM). Notice it has the highest correlation with both indices.

Correlation vs. SPY 9-July-2009 to 09-Jul-2010
Stock Symbol	R2
APKT	0.22
EW	0.53
GE	0.87
NRGP	0.51
HTWR	0.24
MED	0.55
MMS	0.59
SXCI	0.53

Correlation vs. IWM 9-July-2009 to 09-Jul-2010
Stock Symbol	R2
APKT	0.45
EW	0.62
GE	0.84
NRGP	0.64
HTWR	0.43
MED	0.49
MMS	0.79
SXCI	0.68

Related Posts:

• Analyzing Stocks with Wolfram Alpha
• Do All Time High Stocks Outperform? Research suggests they do.