The correlation between the S&P 500's performance with that of its individual stocks has never been higher -- it currently stands at 0.73.
This correlation, which is measured on a scale from -1 to 1, indicates how much an individual stock can be expected to change in market value given changes in the S&P 500. 0.73 is nothing to sneeze at.
That means member companies with fundamentals that differ from the S&P 500 find their differentiations to be increasingly irrelevant. Any upswings or downswings in the market will pull that specific stock with it, even if it is undeserving of the change.
"This correlation is up from a statistically insignificant 0.44 correlation before this tumultuous August," reports CNBC.
More than ever, events outside a company's concerns are taking its toll on market value. And more than ever, individual stock performance is less associated with company health.
If you're wondering why member stocks are essentially forced to ride the greater S&P trend, the answer boils down to two words: Basket trading.
This is when investing firms buy, move, and sell large groups, or baskets, of stock at once, usually without considering the individual member stocks.
This trading activity may have escaped a lot of investors' attention, but it is happening on a grand scale.
The largest culprits of basket trading are the increasingly popular exchange-traded funds, or ETFs.
The markets offer an increasingly diverse selection of publicly traded ETFs that allow investors to trade in entire stock indexes like the S&P 500 or market themes such as smartphones, green energy, or rare-earth stocks. The actual trading is largely done though black-box trading or "the buying and selling of millions of stocks in milliseconds based on algorithmic models."
This type of "algo-trading" has accounted for nearly 70%, and recently up to 80% of market volume.
Surely, ignoring the fundamentals of stocks, and correlating the performance of the weak with the strong, adds volatility to the market. Yet high-frequency traders and exchange-traded funds, two of the strongest forces at hand in basket trading, are quickly becoming the norm.
In fact, higher correlation means it is becoming more and more difficult to be a stock picker. With stocks so strongly correlated to each other, it is hard to pick a good benchmark, thus average investors, fundamental investors, or even long-hold mutual funds are having a hard time picking out "good buys."
So how can you find stocks that aren't highly correlated to the overall market? One way is to look at the beta indicator.
"Beta" is presented as a number from which you can glean much about the stock's volatility or risk compared to the overall market. It measures how the stock has behaved relative to the market in the past (often a useful predictor for future performance, although past performance does not guarantee future results).
A beta of 1 indicates the stock has generally moved in tandem with the market. Ex: When the market rose by 2%, the stock rose by 2% as well. A beta between zero and 1 means the stock has generally been less volatile than the market (less risk for investors). Ex: When a beta is 0.5-50% less volatile than the market-if the market rose by 2%, the stock generally rose by 1%. When the market dropped by 2%, the stock generally dropped by only 1%.
In the same fashion, a beta greater than 1 means the stock has generally been more volatile than the market (more risk for investors).
If a stock has a negative beta, it means the stock has generally moved in the opposite direction of the market. Ex: If beta is -0.5, when the market dropped by 2%, the stock generally rose by 1%. If beta is -2, when the market rose by 2%, the stock generally dropped by 4%. If a stock has a beta of zero, it means the stock has generally behaved independently of the market over time.
To help you start your search, here is a list of low-beta stocks (below 0.5) with insider buying.
Insiders think these stocks will rally, do you think these companies are good stock picking candidates?
List sorted by insider buying as a % of share float. (Click here to access free, interactive tools to analyze these ideas.)
1. GeoEye (Nasdaq: GEOY ) : Information & Delivery Services Industry. Market cap of $790.41M. Beta at 0.39. Net insider shares purchased over the last six months at 810.0K, which is 4.07% of the company's 19.92M share float. The stock has had a couple of great days, gaining 8.6% over the last week.
2. US Gold (NYSE: UXG ) : Gold Industry. Market cap of $805.77M. Beta at -0.29. Net insider shares purchased over the last six months at 3.07M, which is 2.85% of the company's 107.61M share float. The stock has gained 19.64% over the last year.
3. MAKO Surgical (Nasdaq: MAKO ) : Medical Appliances & Equipment Industry. Market cap of $1.45B. Beta at 0.14. Net insider shares purchased over the last six months at 485.14K, which is 1.53% of the company's 31.71M share float. The stock is a short squeeze candidate, with a short float at 17.93% (equivalent to 7.11 days of average volume). The stock has had a couple of great days, gaining 19.99% over the last week.
4. RLI (NYSE: RLI ) : Property & Casualty Insurance Industry. Market cap of $1.32B. Beta at 0.41. Net insider shares purchased over the last six months at 96.75K, which is 0.56% of the company's 17.20M share float. The stock is a short squeeze candidate, with a short float at 9.25% (equivalent to 17.3 days of average volume). The stock has had a couple of great days, gaining 7.46% over the last week.
5. Questcor Pharmaceuticals (Nasdaq: QCOR ) : Biotechnology Industry. Market cap of $1.79B. Beta at -0.07. Net insider shares purchased over the last six months at 181.88K, which is 0.33% of the company's 54.91M share float. The stock has had a couple of great days, gaining 11.12% over the last week.
6. Iridium Communications (Nasdaq: IRDM ) : Communication Equipment Industry. Market cap of $540.29M. Beta at 0.21. Net insider shares purchased over the last six months at 85.10K, which is 0.20% of the company's 42.44M share float. The stock is a short squeeze candidate, with a short float at 20.89% (equivalent to 18.57 days of average volume). The stock has performed poorly over the last month, losing 13.48%.
7. Beneficial Mutual Bancorp (Nasdaq: BNCL ) : Regional Banks Industry. Market cap of $665.13M. Beta at 0.37. Net insider shares purchased over the last six months at 38.0K, which is 0.12% of the company's 31.63M share float. The stock has had a couple of great days, gaining 11.05% over the last week.
8. Hot Topic (Nasdaq: HOTT ) : Apparel Stores Industry. Market cap of $386.23M. Beta at 0.33. Net insider shares purchased over the last six months at 40.0K, which is 0.10% of the company's 40.91M share float. Offers a good dividend, and appears to have good liquidity to back it up -- dividend yield at 3.26%, current ratio at 2.36, and quick ratio at 1.4. The stock is a short squeeze candidate, with a short float at 8.56% (equivalent to 5.28 days of average volume). The stock has had a couple of great days, gaining 11.54% over the last week.
9. Capitol Federal Financial (Nasdaq: CFFN ) : Savings & Loans Industry. Market cap of $1.82B. Beta at 0.41. Net insider shares purchased over the last six months at 139.50K, which is 0.09% of the company's 157.42M share float. The stock has gained 1.4% over the last year.
10. Idenix Pharmaceuticals (Nasdaq: IDIX ) : Biotechnology Industry. Market cap of $581.71M. Beta at 0.23. Net insider shares purchased over the last six months at 38.08K, which is 0.06% of the company's 60.35M share float. The stock is a short squeeze candidate, with a short float at 5.78% (equivalent to 5.38 days of average volume). The stock has had a couple of great days, gaining 26.83% over the last week.
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
Kapitall's Becca Lipman does not own any of the shares mentioned above.
RSS Headlines
Fool UK