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Show HN: Find the 10 highest and 10 lowest correlations to any stock

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Re: Show HN: Find the 10 highest and 10 lowest correlations to any stock

#131

Post by betwixthewires »

dhosek wrote: post #49
karxxm wrote: post #20

Are you also considering time lagged correlations? To me I don't care if a certain stock is correlated by something, I would more like to know which stocks do have correlations or if there are correlations with a time lag

I was thinking the same thing. To know that ABC follows DEF by x days with 95% accuracy would be a superpower in investing. Of course, the problem with something like this is that using it would, of course, ultimately change the market so that x →0.

That's not necessarily true, there are positively reinforcing relationships and negative ones too. So, some strategies, everyone does them and the result becomes less predictable, others, everyone does them and the result becomes more predictable. A common modern example of a positive reinforcement is people pumping meme stocks. There are strategies that the more people know about it the stronger it becomes.

Re: Show HN: Find the 10 highest and 10 lowest correlations to any stock

#132

Post by bumby »

andrewmcwatters wrote: post #52
scarmig wrote: post #37

Earlier quoted context omitted.

That still makes sense. Something can be more or less correlated with the broader market. It's very useful, actually: you can use securities that tend to not be correlated with the broader market to build a portfolio with less average variance.

Yeah, I understand the concept, its just that regardless that people can graph it, doesn't mean that it widely has any tangible meaning other than being able to play with the numbers that come out of it. It's a concept that fits nicely in the category of technical analysis, but not one that allows you to find any particular market insights. If you took the whole tradable US securities market and said "what doesn't co…

>If you took the whole tradable US securities market and said "what doesn't correlate with these price movements?" it doesn't mean anything.

If it did, I would ask you, "What explicitly do you _think_ this means?"

Caveat: I'm an idiot and just trying to understand from a layman's perspective.

Wouldn't you be able to use this to invest when you think the market, as a whole, is overvalued?

For example, if the tool showed that a 30-year treasury bond (or similar) was negatively correlated with the S&P 500, wouldn't it suggest it was a good idea to buy bonds (or similar) when I thought the overall equity market was overheated? The idea being there are certain industry/stocks like maybe precious metals/mining that do well when the rest of the market is tanking?

Re: Show HN: Find the 10 highest and 10 lowest correlations to any stock

#134

Post by snake_doc »

macco wrote: post #122
snake_doc wrote: post #16

In many ways, compared to a vanilla short position or a synthetic short via derivatives, you are implicitly accepting higher risk to “short” via this manner. This is generally a bad idea as it’s hard enough to arbitrage the same equity on different exchanges[1]. Now imagine trying locate perfect negative substitutes for an equity… [1] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=525282

I highly doubt your assessment. When you have a short position, with underlying values you don't own, you have a leveraged investment. Which is inherently more risky than investments in a base value. The idea is not to have perfect negative correlations, but to find values with some negative correlation. This way you can profit from falling prices of an asset. Not with a 1 to 1 yield, or even higher.

In equity markets, risk is measured in volatility or the standard deviation of return. By definition a short and long position of an equity has the same volatility or standard deviation of returns. You may be using the term risk colloquially, but your understanding of leverage under a short sale is also misguided. If you short a stock and have cash to cover, you don’t need leverage. If you short a stock and the position is in the black, you don’t need leverage. You only need leverage if your short position is in the net negative. Yes, you may have to pay borrowing costs for the stock, but that’s just normally known as transaction costs. Until you require leverage to keep the short position open when it’s net negative or you used the cash proceeds, you are not leveraged.

If your goal is to manage the maximum loss from a short position, it’s much easier to short the stock and buy a protective put. This gives you perfect exposure to your bet, while allowing you to manage your loss exactly.

Re: Show HN: Find the 10 highest and 10 lowest correlations to any stock

#137

Post by elihu »

davidkuennen wrote: post #35
runeks wrote: post #13

Super useful! However, I get a “504 Gateway Time-out” error for https://betagainst.fun/asset/bz__f_bno/ . HN hug of death?

I suspect HN hug of death

I think so. It seems to be running a lot smoother now than it was earlier today.

Re: Show HN: Find the 10 highest and 10 lowest correlations to any stock

#139

Post by MuffinFlavored »

loxias wrote: post #84

Great project! Even more so, congrats on shipping something! A little tip from someone who dabbles in algorithmic trading, look into cointegration as well as correlation. Also, the cross correlation matrix changes over time, you can have great fun seeing spikes and convergence/divergence as markets tend to get more or less correlated reacting to real life events.

any success algorithmically trading SPY?

Re: Show HN: Find the 10 highest and 10 lowest correlations to any stock

#140

Post by nopassrecover »

nopassrecover wrote: post #24
iso1631 wrote: post #19

I can see the risk in short positions - you theoretically could lose an infinite amount (if you borrow X shares of something, sell them, but then can't find any to buy when it comes to returning them), and it's certainly possible to lose more than you put in (sell 100 short at $10 netting you $1000, price doubles overnight on new news, you have to buy $2000, losing a total of $1000 in the process. If price trippled o…

In principle you have the same problem if you’re selling naked put options

Both sibling comments are completely correct, and support the parent comment (thanks!).

I got myself mixed up and was misled by a Corporate Finance Institute quote (which incorrectly notes the loss is unlimited only to contradict itself):

For the seller of a put option, things are reversed. Their potential profit is limited to the premium received for writing the put. Their potential loss is unlimited – equal to the amount by which the market price is below the option strike price, times the number of options sold.

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