Nick Colas: Correlations Ticking Back Up

The idea behind tracking correlations between stocks is to get a sense of how much longevity a particular market trend might have. It is one data point, to be sure, but a good one.

Correlations had been dropping steadily since the Eurosave as the market had moved higher. We saw all kinds of healthy rotation in the tape and non-lockstep action between the various sectors.

But now, Nicholas Colas (ConvergEx Group chief market strategist) is seeing correlations once again ticking higher. Some data from his report this morning:

Every month, we run an analysis of the correlation shown by various asset classes relative to the S&P 500.  Here’s a summary of what we found this time around:

·         The ten industry sectors of the S&P 500 currently trade with an above-average amount of correlation to the index itself as compared to the last +3 years.  As the data table after this note shows, the average correlation for industries such as Financials, Technology, Materials and Health Care is 86.5% since October 2009.  Last month the average was 88.5%.  That’s still within the “One sigma” standard deviation of 6.2%, but distinctly above the norm.


·         Most sectors show a higher correlation to the price action of the market index than in October 2012.  Only Technology, Financials and Materials show lower correlations over the last 3 months.


·         This is surprising, since over the last four years a rising market usually comes with lower industry correlations.  You’ve no doubt heard the saying that “The market takes the stairs up, but the elevator down.” Well, that elevator is also very crowded, since selloffs have been “Macro” in origin – think U.S. fiscal policy debates or European monetary experiments – and tend to push all risk assets around pretty much in unison.


·         On its own, this observation would be a clear negative for stocks.  A “Healthy” stock market shows lower correlations among industry groups, since their fundamentals are different.  The old pre=Crisis benchmark for industry correlations was about 50%.  We are still in the high 80s, and climbing.


·         You do, however, have to put the move over the past month – both asset price appreciation and correlations – in a greater context.  Yes, U.S. stocks over the past month are up about 3.6%, or 51 points.  But that aggregate move essentially came in one burst on January 2nd, most of it before U.S. stocks even opened.  The period from December 14th to the end of the year was a 40 point churn, first higher then lower.  And since the January 3rd open, the S&P has been in a 15 point band.


·         Many market observers have used the low levels of the CBOE VIX Index to posit that perhaps the ‘Fear Index’ is broken, or that the “Risks” are more than a month away (the VIX’s time horizon), or that things are better than they appear given the headlines about Federal Debt Limits as so forth.  Our own work on the relationship between industry correlations and the CBOE VIX Index shows that the rock –bottom “Fear Index” is in fact out of step with reality.  Over the past few years, the VIX occasionally lingers at strangely low levels, only to come back with a vengeance.  Higher correlations are a good “Tell” of such periods of amplified volatility, and we certainly have those right now.


·         We would also note that virtually every other class we track for this monthly correlation study is acting “Normally.”  Gold and silver correlations are at 25-30%, spot on the long run averages.  High yield and investment grade bonds run 81% and (29)% correlations to U.S. stocks, respectively.  Again, a quick look at the time series charts shows these are very much on top of long run averages.  OK, the Euro is acting a bit oddball-ish, with a record low 9% correlation to U.S. stocks.  We’ll see if that lasts longer than  a month before considering what that might mean.

Colas concludes that higher correlations combined with the ultra-low Vix regime put a continuation of the uptrend for stocks in doubt for the short-term.

Bears watching.




This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

Wealthcast Media, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. For additional advertisement disclaimers see here:

Please see disclosures here.

What's been said:

Discussions found on the web
  1. taxi to airport from cheltenham commented on Sep 17

    … [Trackback]

    […] Find More on on that Topic: […]

  2. Blazing Speed Trader review commented on Sep 23

    … [Trackback]

    […] Information to that Topic: […]

  3. is bitcoin loophole legit? commented on Sep 27

    … [Trackback]

    […] Here you can find 57669 additional Info to that Topic: […]

  4. commented on Oct 03

    … [Trackback]

    […] Find More Info here to that Topic: […]

  5. 토토사이트 commented on Oct 17

    … [Trackback]

    […] Find More Info here to that Topic: […]

  6. where is 7lab pharma located commented on Nov 14

    … [Trackback]

    […] Find More here to that Topic: […]

  7. top online casino malaysia commented on Nov 21

    … [Trackback]

    […] Find More here on that Topic: […]

  8. hotelfinder commented on Dec 15

    … [Trackback]

    […] Find More Information here to that Topic: […]

  9. DevOps as a service companies commented on Feb 05

    … [Trackback]

    […] There you can find 92647 additional Information to that Topic: […]