# Leader & Laggers S&P 500 Update

In my last post I talked about a program that would find a stock that would lead or lag a stock you selected.  Lets take \$AAPL for example.  Below are the top 5 positive and negatively related intra-day stocks for Apple Computers calculated on 9/18/2010 with 5 minute bars.

However, there is a special attribute to this information.   \$AAPL time1 is not correlated with \$DTV time1 then squared (that is how you calculate R^2. Read about it here).  It is correlated with time3 of \$DTV.  The illistration below should help.  (Please note the prices below are for examples purposes only)

On the left is the traditional stock by stock correlation.  On the right is a leaders/laggers correlation.  What this does is allow you to have an understanding of what \$DTV will do with greater confidence than if it was correlated with \$AAPL time1.  The reason is this:  When a stock is trending that trend can change suddenly and if you’re pairs trading or using correlated stocks it will change immediately with it.  When you lead/lag the R^2 tells you that while \$APPL is rising 10 mins later \$DTV should be rising as well (within a degree of confidence of course). Also if \$APPL is reaching a bottom \$DTV should reach a bottom 10 minutes later.  The chart below should illustrate this concept

As you can see as \$AAPL hits a bottom at \$243.62 at 11:45am \$DTV hits it’s bottom at 37.70 11 minutes later at 11:56.  This is the power of lead/lag.  There are many strategies one can implement knowing this information.

I am working on posting popular lead/lag coefficient such as the ES_F, EURUSD, and \$AAPL within this up coming month.

Hope you enjoyed this post