Wednesday, February 18, 2009

Correlation of the Dow 30 Stocks

Following our post on how the DJIA index is really a Dow 15 index, here is a correlation study of the 30 stocks that compose the index.

1. Considering prices over the last 6 months.

Bright green indicates correlation of over 0.85
Dark green indicates correlation of over 0.75

(please click on image to enlarge)

Note that in the table above (870 points) there are zero negative correlations under -0.10, while there are 291 correlations over 0.75.
XOM is the only negatively correlated stock with any of the others in the entire index. All others have some degree of correlation with each other.

2. Correlations considering 2009 prices only (since January 2).

Similarly, there are 164 correlations over 0.75.

The only stock really with negative correlations to any of the others is IBM. Note that IBM is the only stock to go up in 2009. All other stocks have some degree of correlation with each other, with the exception of MSFT and KFT which had no strong correlations.

AA is positively correlated with 20 other stocks and MCD with 19 others respectively. AA and MCD themsleves have a positive correlation of 0.92! Either of these may be seen as a proxy for the entire index. UFC has positive correlation with 18 others, and a 0.98 (near perfect) correlation with AA.

This chart shows the prices of the DJIA stocks since Jan 2 2009:

(please click to enlarge)


The conclusion is that the DJIA (or the DIA ETF) offers near zero diversification. As we found our previously, the index is also determined by only one half of its stocks (the DOW15), since the other half has fallen in price very heavily and the index is price-weighted.

This is a very dangerous index to invest in, and one that can be easily manipulated or controlled.

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