Monday, 19 December 2011

GE Correlations vs SPY & XLF

As of late, macro factors (i.e. recession, Europe crisis) have been the primary driver of market performance, indeed of the entire market as opposed to individual corporate fundamentals.  One interesting example is GE and how it compares vs SPY (S&P 500) and XLF (Financial ETF).

Generally, I had observed that GE was trading much more like a financial stock as opposed to a conglomerate manufacturing/industrial company.  So plotting a correlation between daily change in GE stock vs daily change in SPY/XLF is an interesting exercise.  The first correlation goes back 8 months to March while the more recent correlation only goes back 1 month to mid Nov.

First Off - The correlation between GE and SPY is pretty close at 0.80 Rsquare and you can tell from its relationship to the 1:1 axis that generally GE is slightly more volatile than SPY.  Within the last month, GE has become less correlated to SPY, falling down to a 0.68 correlation.

Second Off: Ge vs XLF correlation.  Surprisingly, 8 month correlation between GE and XLF is only 0.76 which is strong but not stronger than the SPY correlation as I would've expected.  However, what is interesting is the 1 month GE vs XLF correlation which has actually increased vs the 8 month data point.  This likely is due to the Europe financial crisis that hit in August.  With that macro event, GE has become more and more like a financial stock, as initially observed.  Note that GE tends to be less volatile than XLF.

Finally, just an interesting comparison between XLF and SPY.  Correlation between XLF and SPY is pretty high as you would expect since SPY contains a number of financial companies.  However, 1 month data showed XLF and SPY becoming more correlated, which likely is the same effect seen as GE where SPY is now driven by more macro factors which is almost solely the basis behind XLF moves.

Verdict:  While macro factors, especially the Europe financial crisis, has increased correlation and performance between various stocks, GE has become more correlated to financials as its correlation has dropped vs SPY and become closer to XLF.

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