Market analysts can view the market through different lenses. Each is tinted a distinct shade providing varying perspectives on the behavior of stock prices. One of the more interesting glasses and one that is crucial to your understanding of our currently volatility-ridden marketplace is correlation.

Said simply, correlation measures the relationship between two stocks. For you math geeks, we’re talking about the correlation coefficient here.

One of the bedrock beliefs of diversification seekers is that you want to own assets that are uncorrelated. That way you have less overall portfolio risk. If some of your assets zig while the others zag, then you will experience less volatility than if they all moved together.

In the world of charting, we use the correlation indicator to measure the degree to which two stocks (or ETFs) are related. For ThinkorSwim users you will find it under the “Studies” menu. The study is easy to read. It’s a line that fluctuates between -1 and +1 with zero sitting in the center. A reading of +1 means the two stocks in question boast a perfect positive correlation. That is, they always move in the same direction. Alternatively, a reading of -1 means they carry a perfect negative correlation. When one zigs the other always zags. A reading of zero means they are uncorrelated.

Correlation among stocks fluctuates. But here’s today’s key point: correlations run to +1 during a correction or bear market. The rewards of stock picking melt in the face of a monolithic market. If the S&P 500 rips, your stock will rip. If it dips, your stock will dip. We’ve seen this phenomenon play out over recent months. Consider, for example, the relationship between the S&P 500 and the financial sector (XLF). During the bull move of 2017, the correlation varied widely with fluctuations as high as +1 and as low as -0.5.

And 2018? Not so much!

In fact, the correlation readings this year look like they belong to an entirely different stock. But they don’t! I could show a chart of any other sector versus the S&P 500, and you’d see the same thing.

So what’s it mean for you as a trader?

First, I’ve been laying out my thesis for how to behave differently in this environment for the past few weeks in the Thursday night Cash Flow clubs and the Options Report. Be sure to go review them if you haven’t already.

Second, in highly correlated markets, stock picking doesn’t get rewarded. You’re typically better off trying to play ETFs and Indexes as your instruments for gaming market gyrations.

Third, bullish is bullish and bearish is bearish. If you have five bull trades on AAPL, AMD, XOM, BAC, and FDX, guess what? You’re not diversified. Your outcome will probably be the same as if you did one trade on AAPL with 5x the size. Why? Because everything is moving as one!

Recognize the benefits of stock diversification are virtually nill during a correction/bear market. Your risk is a function of how many positions you have, not which sectors they’re located in.