Thanks to a strong week from the financials, the financial sector is now the strongest performer over the last month. The next strongest sector is health care. What is interesting to note however, is that the most highly correlated stocks to the $XLV health care sector ETF over the last month have largely been financial stocks.
The below correlation cluster chart has been created by scanning 1500 high volume stocks to find 5 of the highest correlated stocks in relation to each of the 10 major sector ETF's. As can be seen in the chart, 4 out of 5 stocks with the highest correlation to the $XLV health care sector ETF over the last month are financial / banking related stocks (Mastercard, Visa, Comerica, Bank of New York Mellon). This makes both the health care and financial sector worth watching over the coming weeks for potential opportunities.
In terms of sectors that have stood out over the last month, that title goes to the utilities sector ($XLU). The utilities sector is the only area of the market which has been negatively correlated to almost every other sector. This makes utilities related stocks another area of the market worth looking for opportunity to ensure your portfolio is well diversified.
The last area of the market worth noting is consumer staples which is tracked by the $XLP ETF. $XLP has had the lowest overall correlation to the rest of the market over the last month and therefore offers the best opportunity to create a well diversified, low correlation stock portfolio. The below pie chart represents a portfolio consisting of the 10 major sector ETF's indicating the optimal portfolio allocation (ie: position size) for each position when the portfolio is run through the risk adjusted minimum correlation algorithm.
As per the suggested position sizes, $XLP which represents consumer staples has the largest portfolio allocation.
When constructing a diversified stock portfolio the goal is to not only reduce risk but also to use your capital efficiently. This means ensuring that you do not have a portfolio of highly correlated positions tying up capital and increasing your risk exposure to specific areas of the market. With that in mind and given the market's activity over the last month, it may be worth looking for opportunity in the utilities and consumer staples sectors.
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