Sector Correlation to S&P 500: Energy Unhinged

by: Eddy Elfenbein

Eddy Elfenbein submits: I wrote about this yesterday, but I wanted to follow up today. I mentioned how the energy sector has become the most unglued to the rest of the market. I ran the numbers, and I was right.

Here's the correlation of each industry group's daily change to the S&P 500's daily change:

Financials..................78.74%
Discretionary.............76.27%
Industrials.................75.75%
Tech..........................71.32%
Materials...................63.60%
Staples.....................60.79%
Healthcare................58.84%
Utilities.....................38.10%
Telecom....................38.09%
Energy......................31.44%

This is important because for a lot of institutional money managers, the name of the game is doing what everyone else isn't (or can't). These guys are paid on outperformance, so they hone in on ways to avoid what the broader market is doing. In financial theory, this is related to the concept of the alpha coefficient, as in Seeking Alpha.

Let's say you run a gazillion dollar hedge fund in Curacao. If everyone is zigging, you want to zag. Face it: Your ability to zag is what you're all about. Bear in mind, you can own a small number of stocks and closely mimic the market. The number of stocks isn't that important. You can also own a large number of energy stocks and be completely free of what the averages say.