Correlation Between Northern Lights and Direxion Shares

Can any of the company-specific risk be diversified away by investing in both Northern Lights and Direxion Shares at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining Northern Lights and Direxion Shares into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Northern Lights and Direxion Shares ETF, you can compare the effects of market volatilities on Northern Lights and Direxion Shares and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in Northern Lights with a short position of Direxion Shares. Check out your portfolio center. Please also check ongoing floating volatility patterns of Northern Lights and Direxion Shares.

Diversification Opportunities for Northern Lights and Direxion Shares

0.52

Correlation Coefficient

Northern Lights  Direxion Shares

Very weak diversification

The 3 months correlation between Northern and Direxion is 0.52. Overlapping area represents the amount of risk that can be diversified away by holding Northern Lights and Direxion Shares ETF in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Direxion Shares ETF and Northern Lights is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on Northern Lights are associated (or correlated) with Direxion Shares. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Direxion Shares ETF has no effect on the direction of Northern Lights i.e., Northern Lights and Direxion Shares go up and down completely randomly.

Pair Corralation between Northern Lights and Direxion Shares

Considering the 90-day investment horizon Northern Lights is expected to generate 653.63 times less return on investment than Direxion Shares. But when comparing it to its historical volatility, Northern Lights is 14.29 times less risky than Direxion Shares. It trades about 0.0 of its potential returns per unit of risk. Direxion Shares ETF is currently generating about 0.23 of returns per unit of risk over similar time horizon. If you would invest  1,052  in Direxion Shares ETF on September 14, 2024 and sell it today you would earn a total of  2,010  from holding Direxion Shares ETF or generate 191.06% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	100.0%
Values	Daily Returns

Northern Lights  vs.  Direxion Shares ETF

Northern Lights

Risk-Adjusted Performance

0 of 100

Weak

Over the last 90 days Northern Lights has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy technical and fundamental indicators, Northern Lights is not utilizing all of its potentials. The latest stock price disarray, may contribute to short-term losses for the investors.

Direxion Shares ETF

Risk-Adjusted Performance

17 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Direxion Shares ETF are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. Despite quite uncertain essential indicators, Direxion Shares disclosed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Northern Lights and Direxion Shares

The main advantage of trading using opposite Northern Lights and Direxion Shares positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Northern Lights position performs unexpectedly, Direxion Shares can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in Direxion Shares will offset losses from the drop in Direxion Shares' long position.

The idea behind Northern Lights and Direxion Shares ETF pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.

Check out your portfolio center.

Note that this page's information should be used as a complementary analysis to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try the Portfolio Holdings module to check your current holdings and cash postion to detemine if your portfolio needs rebalancing.