I was having a discussion with one of my subscribers about the high correlations with AAPL and the Nasdaq ETF (QQQQ). This particular index is market-cap weighted rather than equal weighting for each component, so with the huge run up in AAPL, it currently makes up for over 20% of the holdings in the ETF. It is pretty obvious that the correlations between the two are going to run very high.
Until they don't-- and that seems to be a buy signal. Check out this chart:
This is a price chart of AAPL with a study on the bottom that shows the 10-day rolling correlation between the stock and QQQQ. We can see that most of the time the correlation is fairly elevated, which makes sense due to the weighting. But every so often we see a breakdown of that correlation, which tends to be a buyable event.
Do note, this is completely unscientific and there are many more robust calculations that could be done related to shorter term standard deviations from the correlation mean-- but that's for another day.
Why does this act as a buy signal? Well, the trend's up in AAPL so it just may be hindsight bias. But it also makes sense that when there is a divergence, it means that there is uncertainty around particular events (Jobs sick or product releases) in AAPL that affects the supply/demand and the correlations. Once that event is resolved, it tends to run higher.
If I were to design a more robust system around this, I would look for statistically significant divergences from the expected correlation on a shorter term timeframe, and then look to sell puts on AAPL and buy puts on the QQQQ as a volatility dispersion trade.