ETF Trading with Larry Connors: JP Morgan, Correlations and the Risk of Timing a Bottom

The following is from JP Morgan …

The correlation between the biggest 250 stocks in the S&P 500 over the past month has reached its highest since 1987 this week, at 81 per cent.

This means those stocks move in the same direction 81% of the time. The historical average is 30 percent. The measure peaked at 88% during the October 1987 U.S. crash, when the Dow Jones Industrial Average fell 22% in one session.

Other spikes in correlation, including the collapse of Lehman and the Japanese earthquake, peaked at about 70%.

Essentially what this means is as Europe goes, so will the rest of the world, especially most U.S. stocks. Trying to find “gems” here is likely fruitless because the majority of stocks are moving together. The biggest moves will come from the stocks with the highest betas and there are no equity safe havens should the market continue lower.

Overall the market is again oversold with the 2-period RSI of our Country Fund ETF Universe at 13.91 and the Main ETF Universe at 17.01. All movement at least for the next few days will be driven by Europe. Even though the primary focus is on Greece, it’s actually spread over multiple countries and multiple governments which has led to a more dynamic situation. It’s times like this that being in cash is a luxury. Eventually a bottom will be made, but the risk of timing that bottom is a matter of luck – a game we won’t play.

The above is from Larry Connors’ Daily Battle Plan.

To learn more about the Daily Battle Plan – including access to Larry’s daily ETF trading signals, click here for more information.

And for more on ETF trading, be sure to visit us here to check out the book that Stocks, Futures and Options (SFO) Magazine called one of the best trading books of 2009: High Probability ETF Trading: 7 Professional Strategies to Improve Your ETF Trading.

Larry Connors is founder and CEO of