What Is Market Similarity
Market Similarity tracks how closely its movement is expected to mirror the S&P 500 over the next one to two years. This is both in terms of direction (up or down) and by how much (by what percent).
How to use Market Similarity?
A high Market Similarity (80 and above), means it is moving, nearly identically, with the S&P 500, both in the same direction and amount. A low Market Similarity (20 and below) means it is moving very differently from the S&P 500. When we created our score for Market Similarity, we decided not to differentiate between stocks that perform better or worse than the market. Market Similarity is only a measure of how far away it is from the market in either direction. In other words, a stock that performs 50% better than S&P 500 will have the same score as a stock that performs 50% worse. Few investment strategies outperform the S&P 500 on longer time horizons. Typically, the longer a stock outperforms the market, the more likely it is due for a reversion. The key takeaway is that Market Similarity is a way to look at risk, as lower Market Similarity comes with higher risk.
It is important to understand how much your investments have and will perform relative to the broader market as a whole. For example, if your stocks have a high Market Similarity it might be a sign that it would be better to simply buy SPY, a security that mimics the performance of the S&P 500. One reason would be to provide more diversification (which reduces risk) while offering similar levels in Market Similarity. This is especially true for stocks with low Downside Breakout and high Upside Breakout scores.
If your portfolio has low Market Similarity, it might actually insulate against losses in a market crash. It is also important to note that stocks could be similar to the S&P 500 in rising markets and not similar in falling markets so you should be sure to do your research on how this tracks historically. That said, it is safe to assume if the S&P 500 crashes, a portfolio or stock with lower Market Similarity will do better.
Update Frequency and Usage for Market Similarity
Market Similarity updates once per day. It doesn't move too fast in one direction or the other and as a result is good to leverage whenever you see the number.