The Ice Age of Correlation Abates

Your boy is speaking on a panel tonight called “Correlation Nation – When all markets and asset classes are in correlation, it’s hard to find a winner” as part of the Dow Jones Expert Series (details below).

The irony here is that correlation has (finally) dropped like the voice of a child star slamming into the brick wall of  puberty.  The drop-off in the degree to which stocks had been moving in unity has a lot to do with the easing of volatility since the year began – volatility and stock correlation are essentially a package deal.

Here’s Brendan Conway in the Wall Street Journal last week:

By one measure, stocks’ tendency toward so-called market correlation has fallen from a high of about 80% in the middle of last year to about 30% now, according to figures compiled by J.P. Morgan Chase & Co. A reading of 100% correlation would mean that stocks are trading in perfect unison.

The swift decline is “the largest drop in realized correlation in the recent history of [the] U.S. stock market,” J.P. Morgan options strategist, Marko Kolanovic, wrote this past week.

This is welcome news to stock pickers who’ve essentially seen one of the most absurd periods of lockstep synchronization in market history.  In October of 2011 84% of S&P 500 stocks were moving in the same direction as the index itself.  Now things aren’t quite so defeating – winners can win and losers can go f themselves down in price.

The Ice Age of correlation has at long last abated, the frozen intra-market relationships have melted away.

That said, a period of sustained volatility can quickly bring back the misery so even the most micro of players need to keep at least a half an eye on the headlines.

Below some info on my song and dance this evening:

If you’re going, say hello!