This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Fundamentals Matter Again in 2012

NEW YORK ( TheStreet) -- Wall Street has once again become a stock picker's market.

The combination of a U.S. credit downgrade by Standard & Poor's at the end of the summer and the escalation of European debt woes throughout the fall sent stock correlation -- the tendency of securities to move together -- to record levels. Investors panicked and pulled billions of dollars out of equities.

But investors need to fear no more as correlation has once again fallen to palatable levels and microeconomic news once again rules the trade.

As stocks moved as one in reaction to European headlines, individual stock picking became difficult throughout the fall. It seemed even a company with strong earnings, little exposure to Europe and great growth potential stood poised to drop just as much as its weak, loss-producing rival after the next headline out of Europe proclaimed the apocalypse was imminent.

At the peak of European fears the Chicago Board Options Exchange S&P 500 Implied Correlation Index reached as high as 91.54, where a reading of 100 means stocks move in lockstep.

Since that November high, the index has dropped to 70.88, the lowest level since September.

Meanwhile, the correlation coefficient of S&P 500 companies looks even more optimistic. The index dropped to 0.67 on Feb. 7 -- a level on par with pre-financial crisis norms -- according to data on the 50-day rolling average from Birinyi Associates in Westport, Conn. The index hit 0.86, its highest level ever, in October.

Oppenheimer chief investment strategist Brian Belski wrote last week that he expected the shift as stocks move from a macroeconomic to a microeconomic focus.

"2012 has been an entirely different story as correlations have fallen dramatically to their lowest levels in over the past 25 years," Belski wrote Feb. 3. "Since we believe that current stock correlation trends are likely to persist throughout the year, it is important for investors to place additional emphasis on active investment strategies."

But the shift also means investors must become more active and aggressive again to really benefit, he said, and recommended stronger emphasis on "underlying fundamental trends as opposed to more passive strategies."

In particular he says valuation factors, such as price to forward earnings and price to cash flow, and technical factors including relative strength are important indicators in today's lower-correlation environment.

"Those investors that focus on proper stock selection will be the ones to ultimately be rewarded," he said.

-- Written by Kaitlyn Kiernan in New York.



>To contact the writer of this article, click here: Kaitlyn Kiernan

To follow the writer on Twitter, go to @Kaitlyn_Kiernan.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG
AAPL $130.28 -1.14%
FB $79.19 -1.19%
GOOG $532.11 -1.42%
TSLA $250.80 -0.26%
YHOO $42.94 -0.31%

Markets

DOW 18,010.68 -115.44 -0.64%
S&P 500 2,107.39 -13.40 -0.63%
NASDAQ 5,070.0260 -27.95 -0.55%

Partners Compare Online Brokers

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs