A lot of traders think they’re protected because they’ve got stocks spread across different sectors. But the truth is, in a real market event, your so-called “diversified” portfolio can still get wrecked — because when volatility explodes, correlation goes to 100%.
That’s what most people don’t understand. You can own Health Care (XLV), Consumer Staples (XLP), Tech (XLK) and Industrials (XLI), and it might feel like you’re diversified.
And in normal market conditions, that might even be true. But when something big hits — a COVID-type event or a geopolitical shock — everything starts moving together.
Correlation Spikes When It Matters Most
On days like inauguration day or when COVID headlines broke, correlation didn’t just go up — it went almost to 100 percent. I’ve looked at heat maps from those days, and nearly every stock in the S&P 500 was red. Didn’t matter what sector it was in, didn’t matter if the company had good earnings, strong cash flow, low debt — nothing. Everything got dumped.
So when traders tell me they’re diversified, I ask — are you diversified for normal markets, or are you protected during high-volatility events? Because those are two very different things. Diversification works when volatility is low. It breaks down when volatility spikes.
The Only Thing That Truly Protects You
This is why I say having a mix of long and short positions is the best defense. If you’re all long, even across different sectors, a volatility shock will crush you. But if you’ve got relative strength names on the long side and relative weakness on the short side, your portfolio has a chance to stay balanced — or even profit — when everything else is unraveling.
I’m not talking about hedging with some complicated instrument. I mean having shorts that are already in place — ones you believe in — that can offset losses when correlation goes vertical. That’s the only way I’ve seen traders stay alive during real chaos.
So don’t kid yourself with sector spread. Real protection comes from structure — and being honest about how markets behave when things get ugly.
Kane Shieh
Kane Shieh Trading
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*This is for informational and educational purposes only. There is inherent risk in trading, so trade at your own risk.
P.S. The Shocking Truth About Where Big Gains Are Hiding
Market research shows that most long-term gains in the S&P 500 and Nasdaq happen overnight…
Not during regular trading hours.
While traders are stuck in the intraday noise from open to close, I’m focusing on entering trades in the last 30 minutes of the day and capturing the move by the next morning.
