Understanding Cross-Sectional Analysis & Correlation
When evaluating stocks, absolute returns only tell part of the story. What matters equally is how a stock performs relative to other stocks in the market.
Cross-Sectional Analysis compares all stocks at a specific point in time, ranking them by performance to reveal which are truly outperforming or underperforming the broader market.
What is Cross-Sectional Analysis?
Cross-sectional analysis examines multiple stocks at the same point in time, comparing their returns and calculating where each stock ranks relative to all others.
Think of it this way: Instead of asking "Did this stock go up?", cross-sectional analysis asks "Did this stock go up more than most other stocks?"
This approach is powerful because:
- A stock can have negative returns but still be a top performer if the overall market is down more
- It identifies relative strength which often persists over time
- It normalizes for market conditions, making different periods comparable
Understanding Percentile Rankings
The percentile rank tells you what percentage of stocks a given stock has outperformed. A stock at the 80th percentile has outperformed 80% of all stocks in the analysis.
| Percentile Range | Category | What It Means |
|---|---|---|
| 90-100 | Top Performers | Stock outperformed 90%+ of the market |
| 70-90 | Strong Performers | Above average returns, consistently beating the market |
| 30-70 | Average Performers | Returns in line with the broader market |
| 10-30 | Weak Performers | Below average returns, underperforming most stocks |
| 0-10 | Bottom Performers | Stock underperformed 90%+ of the market |
Available Time Periods
Cross-sectional analysis is available across multiple lookback periods, each revealing different aspects of performance:
| Period | Trading Days | Best Used For |
|---|---|---|
| 1 Year | 252 days | Standard annual comparison, most commonly used |
| 2 Years | 504 days | Medium-term trends, filters out single-year anomalies |
| 3 Years | 756 days | Long-term performance, captures full market cycles |
| 4 Years | 1008 days | Extended view, useful for identifying consistent performers |
Correlation Metrics Explained
Beyond ranking, our correlation analyzer calculates how each stock's returns relate to the market index. These metrics help you understand risk and diversification.
Pearson Correlation
Range: -1 to +1Measures the linear relationship between stock returns and market returns
Interpretation: +1 = perfect positive correlation, 0 = no correlation, -1 = perfect negative correlation
Spearman Correlation
Range: -1 to +1Measures the rank-based relationship, less sensitive to outliers than Pearson
Interpretation: More robust for non-linear relationships and extreme price movements
Beta
Range: Any valueMeasures how much a stock moves relative to the market index
Interpretation: Beta > 1 = more volatile than market, Beta < 1 = less volatile, Beta < 0 = inverse movement
R-Squared
Range: 0 to 1Shows what percentage of stock movement is explained by market movement
Interpretation: Higher R² = stock closely follows market, Lower R² = stock moves independently
Understanding Beta in Detail
Beta is one of the most important metrics for understanding a stock's risk profile relative to the market.
Formula: Beta = Covariance(Stock Returns, Market Returns) / Variance(Market Returns)
Practical Use Cases
Relative Strength Screening
Identify stocks that are outperforming their peers regardless of absolute returns
Example: In a bear market, a stock with -5% return might still be in the 90th percentile if most stocks are down -20%
Sector Rotation Analysis
Compare stocks within the same industry to find leaders and laggards
Example: Filter by industry and sort by percentile to see which companies are gaining market share
Portfolio Rebalancing
Identify which holdings are performing well relative to alternatives
Example: Replace bottom quartile stocks with top quartile performers in the same sector
Mean Reversion Candidates
Find stocks at extreme percentiles that might revert to average
Example: Stocks below 10th percentile may be oversold; stocks above 90th may be extended
How to Use Cross-Sectional Analysis
Select Your Time Period
Choose 1Y for recent performance or longer periods to filter noise and identify consistent performers.
Filter by Market Cap
Use market cap filters to compare stocks within similar size categories for a fairer comparison.
Sort by Percentile Rank
Identify top performers (high percentile) or potential value opportunities (low percentile).
Click to View Stock Details
Click any row to see the full stock analysis page with correlation metrics, charts, and more.
Key Takeaways
- ✓ Cross-sectional analysis compares all stocks at the same point in time to find relative winners and losers
- ✓ Percentile rank shows what percentage of stocks a given stock has outperformed
- ✓ Beta measures volatility relative to the market — higher beta = more risk and reward potential
- ✓ Pearson & Spearman correlations measure how closely a stock follows market movements
- ✓ R-Squared indicates how much of a stock's movement is explained by the market
Remember: Relative performance often persists. Stocks in the top percentiles tend to continue outperforming, making cross-sectional analysis a powerful tool for momentum-based strategies.
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