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Understand how to use our stock screeners effectively to find the correct stocks and ultimately create a better performing stock portfolio.

In this article we are going to discuss 3 of the stock screeners that we offer, namely:

  • Portfolio Opportunity Finder
  • Single Stock Correlation
  • Correlation Strength Ranking

Each of these stock screeners ultimately have the same goal, which is to make it easy to find the correct stocks for your portfolio. What differs is how each of these stock screeners goes about doing that and how best to incorporate them into your trading or investing process.

Stock Screener: Portfolio Opportunity Finder

This screener is probably our most frequently used and for good reason. If you understand the importance of correlation based diversification, you know how important it is to ensure that only the correct positions get added to your stock portfolio.

The Portfolio Screener first scans through all your existing positions and then searches the stock market for stocks or ETF's that will complement your existing positions. This allows you to always ensure that every new position you add to your stock portfolio is one that makes sense in the context of your existing positions.

Using the Portfolio Screener effectively

Here are few examples of how this screener can help you find the right positions for your stock portfolio:

Only do technical or fundamental analysis on the right stocks

Depending on your existing process for finding new positions, it can often be very time consuming searching the stock market for stocks that meet your technical or fundamental requirements.

Once you've found a new position to add to your portfolio, it's not a good idea to simply enter the position. You first need to check that the new stock is a good fit for your existing positions in terms of correlation and the resulting portfolio risk and expected return.

The goal is to create a capital efficient, well diversified stock portfolio. That means not simply entering every position that happens to meet your technical or fundamental requirements.

After spending all that time analyzing stocks and eventually finding a new position, you may find that you are better off not adding it to your portfolio because it is highly correlated to some of your existing positions.

This is where the Portfolio Screener can help.

First run the screener to find stocks that complement your existing positions in terms of correlation, beta, price and sector. Then, using the resulting list of stocks and ETF's, perform your technical or fundamental analysis only on that list.

By doing this, you make sure every time you find a new position that meets your requirements, you already know that the stock is a good fit for your portfolio. You already know that it complements your existing positions in terms of correlation and diversification.

To summarize:

  1. Scan your existing positions to find stocks or ETF's in the market that will complement your portfolio in terms of correlation and diversification.
  2. Using the list of stocks from step 1, perform your usual technical or fundamental analysis to find positions that are setting up for entry.
  3. Add any stocks that setup correctly to your portfolio, safe in the knowledge that these positions make sense in the context of your existing portfolio.
Offset a highly correlated portfolio

If you find your portfolio getting too correlated (which is not a good thing), use the Portfolio Screener to find stocks and ETF's which have an overall low to negative correlation to your portfolio to help lower your risk and portfolio volatility.

Managing a well diversified stock portfolio is a constant balancing act, especially over the short term (ie: a few weeks to a few months). Keep an eye on your portfolio's overall correlation and diversification parameters and adjust your positions accordingly using the Portfolio Screener.

Hedge your portfolio during market down turns

Long only portfolio's are very common, but they can result in large losses during market downturns. Use the Portfolio Screener to find stocks that tend to move up when your portfolio is moving down. By doing this, your portfolio can remain long only but you ensure that you also hold stocks or ETF's that tend to not follow the market in downturns.

Stock Screener: Single Stock Correlation

This screener focuses on relationships between individual stocks or ETF's and has a variety of practical applications, such as:

Finding highly correlated clusters in the market

If you want to find stocks that tend to follow the price of gold, this screener makes that easy. Simply enter the $GLD ETF into the screener and search for highly correlated stocks. The screener will scan through the stock market for stocks that tend to follow the price of gold.

The same goes for Oil, Silver or anything else you may be interested in. This screener will also help if you're interested in stocks that tend to follow the movements of specific companies, for example $AAPL or $FB.

Finding cheaper proxies

There are some incredibly high priced stocks out there. For example Google currently trading at $996.17 at the time of this article. Or Priceline currently trading for $1857.45, or Chipotle sitting at $475.70 just to name a few.

The reality is that not everyone's trading account is large enough to trade stocks like that. In fact, even if your account is large enough it is often a poor use of capital to do so.

By using the Single Symbol screener you have the ability to look for other stocks which are highly correlated to those which you would like to trade, but which are too expensive. By finding highly correlated stocks, you may be able to trade one stock as a proxy for another while using far less capital to do so.

Hedging and Sector Rotation

It is common for traders and investors to have portfolios which have a certain focus to them, for example they might typically prefer to trade stocks from certain sectors, or they might typically only trade to the long side (ie: they don't hold short positions).

For portfolios that have a certain focus to them, the Single Symbol screener can help offset potential risk by finding hedges. For example if you hold several long Gold stock positions, it may be a good idea to add a few positions to your portfolio that are negatively correlated to Gold.

Another example is the common scenario of being broadly long equities. It may be worthwhile looking for positions that can hedge the risk associated with this kind of portfolio with positions that are negatively correlated to the $SPY.

The same concept applies to having a portfolio focused on specific market sectors. Using the Single Symbol screener along with Sector based ETF's can help avoid sector rotation risk.

Stock Screener: Correlation Strength Ranking

The final stock screener to be discussed in this article is the Correlation Strength Ranking screener. This screener finds correlation extremes in the stock market. Specifically, it searches for the following:

  • The most positively correlated stocks and ETF's
  • The most negatively correlated stocks and ETF's
  • Stocks and ETF's with the lowest correlation (ie: close to zero, aka: No correlation)
Sector Outliers

By searching for correlation extremes within specific market sectors, you can uncover stocks that behave differently to their peers.

For example, if a certain sector has been exceptionally strong over the last 3 months, there may be a potential trading opportunity if you can find stocks within that sector which have been uncorrelated over the same 3 month period. Those stocks may have not yet shown the same strength that their peers have.

Pair Trading

Pair trading typically relies on cointegration more than correlation. However, finding highly correlated stocks can get you looking in the right places for potential pair trading candidates. Once you find the most highly correlated stocks, you can then use our pair trading tool to make sure that the stocks are also cointegrated.

If you are unfamiliar with the term "Cointegration", please refer to this article.

Final Thoughts

This article has covered a few typical use cases for our stock screeners but is certainly not an exhaustive list.

The stock screeners are primarily focused on finding positions that aid in creating a capital efficient and correctly diversified stock portfolio, however they can also aid with hedging, cross position setups, correlation and sector analysis.

We trust the screeners will help you create a lower risk and better performing stock portfolio.

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Diversify Portfolio does not make trading or investing recommendations. This article, as well as all the content and analysis tools on Diversify Portfolio are published as a research and informational service. Please refer to our Disclaimer.

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