Finviz - Correlation Table

1. Finviz - Correlation Table: A Beginner's Guide

Finviz is a powerful, web-based stock screener and charting platform popular amongst traders and investors. While offering a wide range of tools, one particularly useful feature is the Correlation Table. This article will provide a comprehensive, beginner-friendly guide to understanding and utilizing the Finviz Correlation Table, covering its purpose, interpretation, applications, limitations, and how it fits within broader investment strategies.

1. 1. What is a Correlation Table?

At its core, a correlation table displays the statistical relationship between the price movements of different assets. The relationship is measured by a correlation coefficient, ranging from -1 to +1. Understanding this coefficient is crucial:

• **+1 (Positive Correlation):** Assets move in the same direction. If one goes up, the other tends to go up as well. If one goes down, the other tends to go down. Think of two companies in the same booming industry – as the industry thrives, both companies typically benefit.
• **-1 (Negative Correlation):** Assets move in opposite directions. If one goes up, the other tends to go down, and vice versa. This is often seen between assets that respond differently to economic conditions. For example, the price of gold often rises when the stock market falls, as investors seek safe-haven assets.
• **0 (No Correlation):** There is no predictable relationship between the price movements of the assets. Changes in one asset’s price have no bearing on the other’s.

The Finviz Correlation Table presents this information in a matrix format. Each cell in the table represents the correlation coefficient between two assets. The cells are color-coded to visually represent the strength and direction of the correlation.

1. 1. Accessing and Navigating the Finviz Correlation Table

To access the Correlation Table on Finviz, navigate to [1](https://finviz.com/map.ashx) and select the “Correlation” tab. You will initially see a table populated with stocks from a pre-defined index, typically the S&P 500.

Here's how to navigate and customize the table:

• **Symbol Search:** Use the search bar to find specific stocks or ETFs you're interested in. Typing a symbol and pressing Enter will add it to the table.
• **Index Selection:** Choose from various indices like S&P 500, Nasdaq 100, Dow 30, Russell 2000, or customize your own list.
• **Timeframe Selection:** Select the timeframe for calculating the correlation. Options include:

   * **1 Day:**  Correlations based on the most recent trading day.  Useful for short-term trading but can be noisy.
   * **1 Week:**  Correlations based on the past week.  A good balance for short-to-medium term analysis.
   * **1 Month:**  Correlations based on the past month.  Provides a broader perspective, filtering out some of the daily noise.
   * **3 Month:**  Correlations based on the past three months. Ideal for medium-term analysis.
   * **1 Year:**  Correlations based on the past year. Best for long-term analysis and identifying consistent relationships.
   * **5 Year:** Correlations based on the past five years. Helps identify more stable, long-term relationships.  Requires sufficient historical data.

• **Color Coding:** Finviz uses a clear color scheme:

   * **Dark Green:**  Strong positive correlation (close to +1).
   * **Light Green:** Moderate positive correlation.
   * **Red:** Strong negative correlation (close to -1).
   * **Light Red:** Moderate negative correlation.
   * **Yellow/Orange:**  Weak or fluctuating correlation, closer to 0.
   * **White:**  The asset is being compared to itself, always resulting in a correlation of 1.

1. 1. Interpreting the Finviz Correlation Table

Once you have the table populated, the key is to understand what the correlations *mean*. Here's a breakdown of how to interpret the results:

• **Identifying Diversification Opportunities:** A core principle of portfolio management is diversification. You want to hold assets that *don't* move in lockstep. Look for assets with low or negative correlations. Adding negatively correlated assets can help reduce overall portfolio risk. For example, if you hold a lot of tech stocks (which often move together), adding gold or bonds (which may have negative correlations to tech) can provide a buffer during tech downturns.
• **Sector Analysis:** The table can reveal how different sectors are performing relative to each other. If several stocks within the same sector show strong positive correlations, it suggests that sector-specific factors are driving their movements. This can be useful for making sector rotation decisions.
• **Pair Trading:** Pair trading is a strategy that involves identifying two historically correlated assets that have temporarily diverged in price. The trader then takes a long position in the undervalued asset and a short position in the overvalued asset, betting that the correlation will revert to the mean. The Finviz Correlation Table is a valuable tool for identifying potential pair trading candidates. However, remember that historical correlation doesn't guarantee future correlation.
• **Understanding Market Sentiment:** A sudden increase in positive correlations across the board might indicate a "risk-on" environment, where investors are generally bullish and all assets are benefiting. Conversely, a surge in negative correlations could suggest a "risk-off" environment, where investors are fleeing to safety.
• **Identifying Hidden Relationships:** Sometimes, you might uncover unexpected correlations between seemingly unrelated assets. Investigating these relationships can reveal underlying economic or market factors at play.

1. 1. Example Scenarios

Let’s illustrate with a few scenarios:

• **Scenario 1: Tech Sector Dominance** You notice that Apple (AAPL), Microsoft (MSFT), and Alphabet (GOOGL) all have correlation coefficients above 0.8 with each other over the past month. This suggests the tech sector is driving their movements, and a decline in one could likely drag down the others. You might consider reducing your exposure to the tech sector if you're concerned about a potential correction.
• **Scenario 2: Gold as a Safe Haven** You observe that gold (GLD) has a correlation coefficient of -0.5 with the S&P 500 (SPY) over the past year. This confirms gold's traditional role as a safe-haven asset. During periods of market uncertainty, investors often buy gold, driving up its price while stock prices fall.
• **Scenario 3: Pair Trading Opportunity** Two oil companies, ExxonMobil (XOM) and Chevron (CVX), historically have a strong positive correlation (e.g., 0.7). However, due to company-specific news, XOM’s price has fallen significantly while CVX’s price has remained relatively stable. This divergence might present a pair trading opportunity – short XOM and long CVX, anticipating that XOM will rebound.

1. 1. Limitations of the Finviz Correlation Table

While a powerful tool, the Correlation Table isn't foolproof. Be aware of its limitations:

• **Correlation Does Not Equal Causation:** Just because two assets are correlated doesn't mean one *causes* the other to move. There may be a third, underlying factor influencing both. For example, both oil prices and airline stocks might be correlated with overall economic growth, but that doesn't mean oil prices directly cause airline stock prices to change.
• **Changing Correlations:** Correlations are not static. They can change over time due to shifts in market conditions, economic factors, or company-specific events. A correlation that held true in the past may not hold true in the future. Regularly updating your analysis is essential.
• **Spurious Correlations:** Sometimes, assets can appear correlated by chance, especially over short timeframes. This is known as a spurious correlation. Using longer timeframes and considering fundamental factors can help minimize the risk of relying on spurious correlations.
• **Data Quality:** The accuracy of the Correlation Table depends on the quality of the underlying data. Ensure that the data is reliable and up-to-date.
• **Linearity Assumption:** The correlation coefficient measures *linear* relationships. If the relationship between two assets is non-linear (e.g., exponential or logarithmic), the correlation coefficient may not accurately reflect the true relationship. Consider using other analytical tools to investigate non-linear relationships.
• **Sector-Specific Events:** Major events impacting a specific sector can drastically alter correlations. For example, a sudden regulatory change affecting the pharmaceutical industry could cause previously correlated pharmaceutical stocks to diverge.
• **Black Swan Events:** Unforeseen and unpredictable events ("black swan" events) can disrupt established correlations. The COVID-19 pandemic, for example, caused significant disruptions to global markets and altered correlations across various asset classes.

1. 1. Integrating the Finviz Correlation Table with Other Tools and Strategies

The Correlation Table is most effective when used in conjunction with other analytical tools and trading strategies. Here are some ways to integrate it:

• **Fundamental Analysis:** Combine correlation analysis with fundamental analysis to understand *why* assets are correlated. Are they in the same industry? Do they have similar business models? Are they exposed to the same economic factors?
• **Technical Analysis:** Use the Correlation Table to confirm signals generated by technical indicators. For example, if a stock is showing a bullish pattern on a chart, but its correlation with the overall market is negative, it might be a stronger buy signal. Consider using moving averages, RSI, MACD, Bollinger Bands, and Fibonacci retracements.
• **Risk Management:** Use the Correlation Table to assess and manage portfolio risk. Diversify your holdings by including assets with low or negative correlations. Monitor correlations regularly to identify potential risks.
• **Volatility Analysis:** Correlations can be affected by volatility. High volatility can lead to increased correlations, while low volatility can lead to decreased correlations. Consider using ATR (Average True Range) to assess volatility.
• **Sentiment Analysis:** Combine correlation analysis with sentiment analysis to gauge market sentiment. Are investors bullish or bearish? How is sentiment affecting correlations?
• **Elliott Wave Theory**: Understand how correlations might shift during different phases of an Elliott Wave cycle.
• **Candlestick Patterns**: Confirm signals from candlestick patterns using correlation analysis.
• **Ichimoku Cloud**: Use correlation analysis to validate entries and exits suggested by the Ichimoku Cloud.
• **Volume Spread Analysis**: Correlate volume patterns with price movements to assess the strength of trends.
• **Wyckoff Method**: Integrate correlation analysis into Wyckoff accumulation and distribution schemes.
• **Harmonic Patterns**: Validate harmonic patterns with correlation analysis to improve accuracy.
• **Renko Charts**: Use correlation analysis to identify potential breakouts or breakdowns on Renko charts.
• **Keltner Channels**: Combine Keltner Channels with correlation analysis to identify potential overbought or oversold conditions.
• **Donchian Channels**: Use Donchian Channels and correlation analysis to identify high and low price ranges.
• **Point and Figure Charts**: Correlate patterns on Point and Figure charts with correlation analysis.
• **Heikin Ashi**: Validate Heikin Ashi signals with correlation analysis.
• **Parabolic SAR**: Use Parabolic SAR with correlation analysis to identify trend reversals.
• **Pivot Points**: Combine Pivot Points with correlation analysis to identify support and resistance levels.
• **Stochastic Oscillator**: Validate Stochastic Oscillator signals using correlation analysis.
• **Average Directional Index (ADX)**: Use ADX and correlation analysis to assess trend strength.
• **Chaikin Money Flow**: Correlate Chaikin Money Flow with price movements and other correlated assets.
• **On Balance Volume (OBV)**: Integrate OBV with correlation analysis to assess buying and selling pressure.
• **Accumulation/Distribution Line**: Use the Accumulation/Distribution Line and correlation analysis to identify potential divergences.
• **VWAP (Volume Weighted Average Price)**: Compare VWAP with correlation analysis to assess price action.

1. 1. Conclusion

The Finviz Correlation Table is a valuable tool for traders and investors of all levels. By understanding how to access, interpret, and apply its data, you can gain insights into market relationships, identify diversification opportunities, and refine your trading plan. However, remember that it's just one piece of the puzzle. Combining it with other analytical tools and a solid understanding of fundamental and technical analysis will significantly enhance your investment decision-making process.

Technical Analysis Investment Strategies Portfolio Management Risk Management Pair Trading Diversification Market Sentiment Volatility Trading Plan Stock Screener

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