Just in case you didn’t have enough reasons to consider Apple Inc. (AAPL) stock for your portfolio, here’s another fascinating tidbit to mull over: the tech titan has declared its independence from the market.
AAPL and the S&P 500 Index have experienced a falling out of sorts. Whereas the two chums used to pal around together traveling northbound and southbound with synchronicity, they now frequently move in completely opposite directions. This curious change in behavior really started in late-2012 when AAPL began its distressing descent from $705.
Perhaps the easiest way to assess the changing relationship between both securities is using a correlation study. For those otherwise unfamiliar with this powerful indicator, a brief review is in order.
Measuring relationships plays a key role anytime investors are seeking to better understand how different asset classes are linked. It also aids in structuring a diversified portfolio because you need to know which securities move together and which move in opposite directions.
The correlation study measures the degree to which two assets are linked by oscillating in a range between +1 and -1. A score of +1 suggests both assets are perfectly positively correlated which means they always move in the same direction. In contrast, a score of -1 suggests both assets have a perfect negative correlation which means when one rises the other falls and vice versa. Finally, a rating of zero suggests both assets have no correlation meaning the behavior of one has no bearing whatsoever on the other.
As shown in the accompanying 5-year daily chart of AAPL its correlation began a metamorphosis in late-2012. During the “old normal” it boasted a strong positive correlation with the S&P 500 Index rarely venturing into negative territory. Now, however, it’s entered an entirely different phase – the “new normal” – where its correlation is all over the map, hovering near zero and below more than above.
Far from being a good proxy for the market, AAPL has become a rebel stock hell-bent on marching to the beat of a different drummer. How long it lasts is anyone’s guess but while it persists in its independent ways investors in search of true diversification ought to consider adding the stock to their portfolios.