As reported by Small Cap Network’s Jonathan Yates, small cap traders in top gaining stocks such as Sinovac Biotech (NYSE: SVA), BOS Better Online Solutions (NASDAQ: BOSC), Novavax (NASDAQ: NVAX), and CoreLogic (NASDAQ: CLGX) should look to correlation strategies to maximize profits. According to a recent article in The Wall Street Journal, “Traders seek Salvation from Correlation,” stocks have a correlation of 80% in today’s stock markets. With major institutions and high frequency trading dominating the stock markets, this is not surprising. It also offers profit opportunities for small cap traders.
Correlation quantifies the relationship between different data sets, in this case securities. For a perfect positive correlation trading relationship between two equities, calculated as a correlation coefficient of +1, the two securities move in the same direction and with the same percentage change all the time. This type of correlation would be seen between the S&P 500 index and the SPY exchange traded fund which tracks the index. Mastering the relationship between exchange traded funds and correlation trading is crucial as these now account for 30% of the volume in US stock markets, up from just 2% in 2000.