Spotting investment opportunities
Spotting investment opportunities can be done through multiple approaches. Stock investors will use some stock screener tools which help them create lists of potential targets. SGG uses this kind of tools too but the macro approach (top down) uses sometimes correlation.
Changes in correlation provides additional interesting insights about the health of a market. For exemple, a concentrated leadership might be seen as unhealthy. Some assets present “normal” negative or positive correlation and therefore extreme levels are interesting as point of observation. Let’s imagine the following situation! You have a never ending race and all the runners are spread out along the racing track. Let’s suppose that all participants will remain in the race. The distance between the last ones and the leaders (spread) will probably not remain constant. Financial assets (the runners) can be traded in multiple combinations and therefore you can decide to just expose yourself to the spread.
The table here below show the main sector correlation of the S&P 500 to the S&P 500 which is used by SGG to spot potential opportunities.
