Successful short-term trading methods may be developed around the concept of cointegration. The core data set needed to explore these methods begins with identification of security pairings whose return series are correlated in a mean reverting manner.
The way the intuition behind cointegration was first related to me, was to imagine a man walking his dog. The man and dog may seemingly move independently and in different directions for a while, but the leash ensures that they will eventually cross paths.
Among a pool of about sixty tracked ETFs, here are the top ten pairings for the last 250 trading days against the Standard & Poors 500 Spiders (SPY) and iShares MSCI EAFE (Foreign) Index (EFA), respectively, as ranked by the Augmented Dickey-Fuller unit root test.
The pairings presented above each demonstrated a high level of significance (critical values <-3). Don't ask me to speculate on the fundamental underpinnings of each pair result; I'll leave that to you. However, I personally find them occasionally surprising and even amusing! Foreign basket stocks and US Utilities -- who knew?
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