Correlation between Market Index and Stocks

Photo by Pietro Jeng on Unsplash.com

The other day I wrote a post about analyzing the correlation between two crypto coin prices to see if their price movement is related. In this article I would like to take a slightly different direction and discuss the correlation between a market index and different stocks.

Every trader has experienced the effect of the value of his positions plummeting when there is a sudden market downturn. If we could quantify the correlation between the market and our holdings, it would allow us to diversify our portfolio by picking stocks that have a positive and negative relationship to the market.

Taking things a step further, if we find assets that very closely follow the market trends, we may be able to get signals of trend reversals from the market index and make buy/sell decisions based on those signals.

This story is solely for general information purposes, and should not be relied upon for trading recommendations or financial advice. Source code and information is provided for educational purposes only, and should not be relied upon to make an investment decision. Please review my full cautionary guidance before continuing.