Before discussing this weeks market observations, a short introduction to the new Industry Outlier tool is needed. This tool makes it easy to find stocks that have been behaving differently from their peers, ie: outliers. The underlying principle is that stocks within the same Industry tend to exhibit similar price movements over time if they are influenced by the same fundamental factors. With that in mind, there is value in being able to identify stocks which for whatever reason, are outperforming or under performing their peers in the same Industry.
The Industry Outlier tool allows users to select from over 100 Industries and generate a correlation scatter chart of every stock within the selected Industry relative to a choice of ETF's. Alternatively the cumulative correlation of each stock relative to the others can be calculated and used as the axes data. This allows stocks to be directly compared to each other in terms of how correlated their movements have been.
Lastly, users also have the option to generate charts from custom stock lists instead of using existing Industries. This allows users to group and analyze stocks according to whichever underlying similarities they feel are appropriate.
Theory into Practice
To put the above information into practice, we'll be using the Homebuilding Industry. The below screenshot shows the 1 Month stock correlation scatter chart of the Homebuilding Industry in relation to the $SPY (S&P500) and the $XHB (Homebuilders) ETF's. It is clear that most stocks from this Industry are clustering towards the top right of the chart, in other words they are all positively correlated to both the $SPY and $XHB ETF's.
Towards the bottom left of the chart, there are a few outliers which have had a slightly negative correlation to the $SPY and $XHB and are clearly behaving differently from their peers in the same Industry. $CCS (Century Communities, Inc.) in particular has had no similarity in recent behaviour to the other stocks.
Armed with this information, it becomes clear that digging into $CCS to look for opportunity will be worthwhile. Is the stock over or under performing the rest of the Industry? Is the stock over extended and possibly due for a pullback? Is there a reason to believe the stock will continue to over or under perform the Industry? etc...
The Industry Outlier tool makes finding stocks that have been behaving differently to their peers easy. The next step becomes turning that information into actionable ways to profit. In the coming weeks we will be posting strategy suggestions on how best to utilize this tool, the information it provides and how to combine it effectively with the other DiversifyPortfolio tools.
For more articles on strategy, tips, education and stock market analysis - click here to subscribe to our free newsletter