Traders focus on correlations, not fundamentals

Investors on Wall Street are no longer bothering with the boring detail of company performance.
That’s the conclusion from a new study by Barclays Capital, on the correlation between movements in the S&P 500 and individual stocks.
Instead, they are piling into the ‘correlation trade’, as high-speed computers now often account for over 60% of daily trading.
Until 2006, the daily correlation between stocks and the index was just 27%. It was only in exceptional circumstances, such as the Iraq War in 2003, that correlation rose to 60%.
Since then, correlation has become the name of the game. It was 80% at the height of the financial crisis, and again in Q2 during the European debt crisis. And it is still high today, at 74% in August and 60% today.
According to the Wall Street Journal, “such high correlation levels were seen previously only during the Great Depression”. The blog, not being a fan of correlation trading anyway, likes the sound of that parallel even less.