Dissecting The Flashing Red Warning Light Of Record Stock Correlations

Tyler Durden's picture

As we pointed out on Friday, implied correlation closed at an all time high. While this phenomenon is likely the most concerning indicator of a wholesale market meltdown (not to mention that market neutral funds continue on their rapid progression to oblivion: for reference check HFRXEMN and HSKAX), more so than even the Hindenburg Omen (which however does make for a cool soundbite) as there are no endogenous safe-haven sectors within stocks (the safe haven is simply known as bonds, and stunningly high yield also applies even though HY, especially B2/B and lower, and stocks probably differ in some way, but we still haven't quite figured out what), the threat level will only be obvious in retrospect. The very curious topic has incentivized some in the sellside realm to present their own cautionary tales about the trade off and the cost-benefit analysis of a record high cross asset correlation. One among these is BNY's Nicholas Colas, who points out that due to the subliminal perception of record low stock dispersion (or liminal if such people read sites like Zero Hedge), investors have decided to diversify on their own not within stocks, but outside of stocks, the result being record inflows into bond funds (and outflows out of equities). His summary is very concerning: "Investors, even if they have not learned it formally, understand that diversification means lower correlations. As long as stocks, bonds, precious metals, and other assets all move in lock step, retail investors will most likely favor less risky assets." This statement captures the problem better than most: stocks, and their liquid, synthetic, nouveau-CDO cousins, the ETFs, continue to trade higher on ever greater vapors, as the underlying asset base is increasingly devoid of cash. And when the margin call-based liquidations set in, and they will, stocks will collapse more violently, and with far greater amplitude than they did on May 6 (incidentally a date which is an anniversary of the real Hindenburg disaster). Only in retrospect will the current record correlation levels be perceived for the loud alarm bell they truly are. But, courtesy of our idiot regulators, this will certainly not occur sooner, or before it is too late.

More from Colas on this striking phenomenon.

We are, for a variety of reasons, living in some alternative investment universe (call it “Bizarro Investment World,” if you are a Seinfeld fan) where, for the moment, correlations are very high for a variety of asset classes. We noted this phenomenon is last month’s analysis, and in this month’s update we find little diminution of the trend. In some areas it is actually accelerating. The following charts and tables have the data that support the following analysis:

  • Among U.S. stock market sectors, correlations declined very modestly, but remain at near-record highs. Five of the ten industries we track still have correlations to the S&P 500 of at least 95%, and the lowest correlations are around 83% (Utilities and Consumer Staples). Four months ago the lowest correlations were 65-66% (Health Care and Utilities.
  • Rising markets and lower expected volatilities (as measured by the CBOE Volatility Index, or VIX) do tend to push down the correlations among industry sectors. However, even last month’s strong rally in U.S. stocks did little to reduce how much sectors move in tandem with the market overall.
  • High yield bonds reached a new high for correlation with U.S. stocks. In contrast, high grade corporate bonds remained one of the least correlated asset classes - a real bright spot in the analysis.
  • Precious metals – we track gold and silver – both saw rising correlations to U.S. stocks in July. That is a reversal of a trend that started early in 2010, and price movements in precious metals have become more tied to equity priced over the past 60 days.
  • Currencies bucked the trend to higher correlations, at least among the Euro, Aussie dollar and Yen. In fact, the much maligned Euro is at 8 month lows in terms of its relationship with U.S. stocks.

There is a pretty steady diet of explanations for increasingly correlated markets. Here are two of the more popular ones:

  • One school paints the sector correlations as a function of High Frequency Trading (HFT). By most accounts this type of money management dominates the day-to-day trading of U.S. equities. One strategy – the arbitrage of Exchange Traded Funds (ETFs) to underlying stocks – could partially explain why stocks and sectors move closer to indices like the S&P 500. This is especially true, we suspect, in a rising market where the SPY ETF gets a significant amount of inflows because investors want an easy, low cost, way to play the rally.
  • Another explanation is that macroeconomic drivers such as
    • Federal Reserve monetary policy
    • A rolling set of concerns about sovereign debt risk
  • push money into and out of assets without much fine-tuning on considerations such as industry sectors or credit quality. If it is a “risk on” day, everything works. If not, then nothing goes up.

We are sure there are other explanations – these two just come up the most.

I would only point out that there is a real price to pay for such high correlations. This isn’t science fiction any more, it is science fact. The most dramatic development of the last 12 months is that retail investors have pulled cash out of U.S. equity mutual funds even though stocks have done well. Some has gone into stock ETFs, yes. Far more, however, has gone into bonds. Investors, even if they have not learned it  formally, understand that diversification means lower correlations. As long as stocks, bonds, precious metals, and other assets all move in lock step, retail investors will most likely favor less risky assets.



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Turd Ferguson's picture

TD: Glenn Beck mentioned The Hindenberg Omen on his TV show tonight, complete with a picture and video of the crashing zeppelin over his shoulder. It would make a cool screenshot for you to post.

simonsays's picture

Why promote that douche nozzle?

Turd Ferguson's picture

Well, Simon, there are only two possibilities.

1) You've never taken the time to listen to Glenn. I can tell you that, after listening to him for 8 years, he is a very wise and insightful commentator. He's also on our side. If you did actually listen, you'd find that many of his concerns/fears are regularly aired here on ZH, as well.

2) Your just an adol minded, democrat hack. Quick to name-call and only capable of disparaging the messenger, not the message. You can't debate the facts so you attempt to marginalize him with names like "douche nozzle".

So, well, which one is it?

Cheyenne's picture


You're one of my favorite posters here, even factoring in the likes of Chumba, GG, etc. who haven't chimed in for awhile.

However, wasn't one of Glenn Beck's primary advertisers a dubious gold dealer who paid out something like 1/3 what the metal was worth?

I don't watch TV, dude, so I only vaguely associate GB w/what used to be called the right. Who gives a shit about that broken toy?

I mean, I'm glad you defend GB, who for all I know is a stand-up guy. But what's up w/those metal ads?

Geoff-UK's picture

Sure Goldline is ripping people off for price--yet they have a great Better Business Bureau rating because they're up front about it.  As for you blaming GB for that...

Well, caveat emptor dude...do you also refuse to watch reruns of Friends because they have a commercial in the middle of it selling the Ab-Roller?

berlinjames02's picture

Turd, I like your comments, but I'm gonna have to disagree with you on this one.

Glenn Beck reminds me of Andy Bernard (Cornell '96) from The Office, except Beck isn't trying to be funny. Listen to how they both talk- the tone, tempo, pauses and the slack jaw are quite similar. I don't know if Ed Helms is doing it intentionally, but if he is, he's hit the nail on the head.

I usually agree with Beck's positions, but it seems that he dumbs down the message for his viewers. That annoys me. I tune him out because of that. Also because I hate the Dem/Rep debates. Who cares? Both parties are screwing the people but the endless 'side' debate is used to deflect from the real issues.

Turd Ferguson's picture

Cheyenne and Berlin: Thought I'd respond to both of you in one post.

Cheyenne: Goldline is a prominent advertiser for many in talk radio. They advertise on GB radio because his audience hits their demo. Glenn has advocated gold for about as long as I've listened to him, for many of the same reasons so many of us here on ZH advocate gold. The fact that a gold company would advertise on his program is Marketing 101. He has zero financial connection to Goldline. They are simply an advertiser. The motives you should question are those of Rep. Anthony Weiner of NY, the politician who tried to disparage Glenn and Goldline. It seems to me that, again, since Weiner can't dispute the facts or silence/censor Glenn he attacks, instead. If not Glenn, then his advertisers in a blatant attempt to affect his company's financial viability. 

Berlin: You appear to only be familiar with the Glenn Beck TV show. Yes, the message is a bit "dumbed down" but what television program isn't? He's attempting to appeal to a mass audience that may or may not have any idea what he's talking about. He's essentially a teacher in a room full of first-year students. Got to keep it pretty simple for them. You should really try to occasionally listen to his radio program from 9-12 eastern each day. Funny and fun but also deadly serious. One of the reasons I've been a fan all these years is that Glenn isn't afraid to discuss issues other talk shows won't touch. And he's not just another partisan hack like Limbaugh or Hannity. He's a conservative libertarian (just like me, if you haven't already figured that out). He was all over GWBush for his progressive policies and, as you might imagine, Obama and his ilk drive him crazy.

At any rate, my suggestion above stands. Take time to listen to the Glenn Beck radio show. Don't just write him off because of something someone told you he said or some comment a liberal friend of yours made. Listen for yourself. Form your own opinion.

Lastly, I have met Glenn in person. Maybe I'm just a sycophantic nutcase. Perhaps. It's possible. Its also possible that in my 44 years I've become a pretty good judge of character. Glenn is the real deal, man. Honest and straightforward. Not much different from the rest of us except for the fact that he rarely sleeps, writes best-selling books, hosts a 3-hour radio program and has a daily television program. The guy's making the most of his talents. I wish I could say the same thing about myself.

RockyRacoon's picture

Hey, Mr. Turd.  I used to be a Beck fan but over the years the shine has faded.  There isn't much doubt that many people believe in what they espouse, but it's not the faith that counts -- it's what they believe that may be in question.  Beck has changed positions a notable number of times and I've been confused by that.  The personal fervor seems to drift like a wind sock, according to the best audience reaction.  Not to characterize yourself, but many of his adherents are now getting fringier, if that is a word.

minus dog's picture

Not a defense of Beck, but... this is an odd platform from which to throw proclaim others fringy, eh.

Conrad Murray's picture

Beck used to be the best talking head on TV.  Unfortunately, as of late, he has been going all religious nutso.  It's all fine and dandy to have faith and go to a place of worship, but he should really check that shit at the door of the studio.  I have to imagine it is playing a large part in his ratings decline (although he still crushes his competition). 

I used to watch his show every day, but ever since the flotila incident I find him harder and harder to stand.  He went from driving down into important philosophical positions, in an easily understandable to the masses way, to being one step above that schmuck Huckabee.  His fake ass "golly gee I just don't understand where the world is today" look/persona needs to go.  Hopefully after his revival bible study camp on 8-28 he'll get back to business.  But, if not, there's always(hopefully) Freedom Watch with Judge Napolitano.

Cheyenne's picture


Thanks for responding. Based on your post, I still don't know what goldline pays out, but I get your point.

First off, I'm 44 myself, since you bring it up. Don't doubt you re GB, as I say, he could be a stand-up dude.

I move metal at 31 N. Clark in Chi-Town. They charge, anh, spot + $50 some odd. All I know is it's a way better deal than goldline, shitty as $50+ is.

My point here is simply to let folks know goldline is bullshit. Don't give a fuck if that don't sit right w/some TV show.

The time for that has come and gone. Now it's brass tacks. So how much for the monkey?

TraderTimm's picture

All I needed to know about Goldline is summarized in this infographic:


Hoo boy...


swmnguy's picture

That's pretty damning.  It doesn't change my mind in any way, as I have always found Beck to be a very cynical operator and I've never liked him, and I've seen enough scams like "Goldline" to be quite cautious.  But Ritholtz's graphic goes to the trouble of explaining the joke step-by-step.

Pat Hand's picture

He's essentially a teacher in a room full of first-year students.

No, he is not a teacher.  He is an entertainer, first and foremost.  He gets paid for attracting eyeballs to advertisors.  He is not even remotely the real deal.  Yes, he works hard.  Honest? not so much

hedgeless_horseman's picture

Last week, I brought up the record correlation subject with a friend who is an analyst at a big fund.  (S)he brushed off my, "stock picking is dead," comment with the retort, "We became the biggest holder of Priceline, on my recommendation, and it went up 20%."  I still don't have a good reply, which is fine, because she is smart, beautiful, and self made.

Budd Fox's picture

Stop searching a reply...just marry her and be happy foreverafter.

Astute Investor's picture

Tell her to enjoy her 15 minutes of fame at Marsico.

Conrad Murray's picture

"(S)he brushed off my....which is fine, because she is smart, beautiful, and self made."

We have a friendly game of poker around here on the 3rd Saturday of the month if you care to join.  Tell the ex-squid to come along too.

Thorlyx's picture

no shit ! (S)he bids the price up, accumulate holdings and the price is rising ? What a coincidence !

Remember the Hunt guys ? they were also bidding silver up and up it went (for a while).


Caviar Emptor's picture

In truth, we probably can't ascribe high correlations to a single factor. But I'd like to suggest one key factor that wasn't listed and that I noted last quarter as well. To unravel the mystery I simply used the "follow the money" principle. What could push up stock valuations AND debt at the same time? There's only one 800lb gorilla in the room so we don't need to look too far.

Here's the scam. Junk bond issuance is setting a new all time record this quarter, topping the record set...last quarter. There's a serious chunk of change (over $148 billion YTD or about half the TARP annualized) being gambled on junk bonds during economic bad times....or is it? 

I contend that this is the mother of backdoor bailouts. TBTF banks have been given marching orders to buy US high yield corporate debt to avoid disaster. They do this at very little risk because they borrow at near 0%, they have the implicit full backing by the Fed, they can mark to unicorn and I can bet they won't be left holding the bag as they offload to state run pension funds, charities, university endowments and yield chasing dupes. 

Now the final puzzle piece: "US corporates are flush with cash". You've heard this one all year. How did all this cash materialize? The urgent need for this scam comes from the ultra slow economy combined with the high levels of debt that companies carried coming into the crisis that needs to be rolled urgently. So issuing junk bonds provides a quick cash infusion. It also puts lipstick on the pig balance sheets that suddenly look cash rich. Great balance sheets improves stock valuations. And so the circle is now complete: bonds move higher AND stocks move higher in direct proportion. 

Caviar Emptor's picture

Oh yeah. I'll bet they got a plan on a cocktail napkin at the very least 

augmister's picture

No, pension fund debt!  Bailouts for the unions!

Catullus's picture

Could I adjust this and remove the marching orders part and just say banks are yield starved right now?  Whether sinister or just a rational problem of deploying "excess" cash by the banks, the resulting action is still the same.


Cognitive Dissonance's picture

We can look for all kinds of logical reasons for the high correlations among a variety of asset classes. And I'm sure some reasonable sounding explanations can and will be found. And everyone will shake their heads up and down and say "Yup, that sounds reasonable". Or some may say "Maybe this or that might be a better reason for these or those".

It doesn't matter one bit. Some basic facts are real.

1) Desperate men will do desperate things. And the desperate men are pumping every asset class as hard as they can for as long as they can. Period.

2) Desperate men will hide their actions as best they can at first. But it will become increasing apparent that the desperate men and women will care less and less if it's obvious what's going on or not. They won't really care if we see who the men and women are behind the curtain.

3) As the primary wizards become increasingly desperate, the secondary and tertiary wizards will also become increasingly desperate as they try to extricate themselves from the mess without tipping their hands and collapsing the Ponzi before they make their escape.

4) As the Ponzi comes apart at the seams, all the wizards will scratch and claw to save their own butts and in the process will take many others down with them. At this point, there are no more innocent bystanders hanging around in the markets. Anyone who remains in the market is risking life and limb and knows it, should know it or doesn't know if because of a deep seated denial that in and of itself is life threatening.

5) Anyone who is still looking for proof that the markets are manipulated and/or rigged is simply doing so to satisfy some deep seated need to find the bad guys and then point fingers, possibly in the hope of sparking a public lynching or just to see "justice" carried out. This won't happen, at least not very soon, because those who are still in denial and/or still in the market, which is still a very large portion of working people who have 401(k)s or pensions invested (even in bonds) are captured by the market and won't turn on the market Ponzi wizards because that will only increase the speed of collapse. 

Even those among us who state that they wish to see the system come down to begin the cleansing will panic themselves when they see the desperation and suffering of their fellow human beings. No one with a conscious self awareness can easily endure seeing abject suffering by those around them. This will serve to prolong the unraveling further.

The point is simple. This collapse and cleansing will take far longer and be much more destructive than even the most hardened souls think it will be. And I've personally grow weary with the endless effort to expose the Ponzi, as if by exposing it we might be able to end it. Not going to happen unless and until we, all of us, decide it is going to end. I don't care how much evidence we stuff in some one's face. If they don't wish to look, there's nothing we can do to make them.

Since the people in power who can stop this have no desire to do so for whatever reason, that leaves it up to us to do so and revolt the only method remaining. Since we have not yet lost enough to begin to act like we have nothing left to lose, revolt is off the table and will probably remain there.  

At best, we are simply amassing evidence to be presented when the reconciliation and restitution trials begin, assuming we have the desire to carry them out after being ravaged by war for many more years, including full frontal fascism and eventually quasi martial law at home. Not being negative in the least. I'm being realistic. See you on the other side.

spinone's picture

Thanks.  Now I'm going to have nightmares.

NoVolumeMeltup's picture

I think you've taught a lot of people here more than you realize. Myself included.

I'm due for a re-read of Welcome to the IA because it hit home.

We needn't feel powerless since we have autonomy over our personal sphere (and contribute to a collective understanding by extension?) at all times. So long as we recognize it.

So thanks, man.

Turd Ferguson's picture

Wow, CD, that was very well written.

Thanks for taking the time to post it.

Dapper Dan's picture

Dapper Dan's wife here- Thank you for the insightful and thought provoking series "Welcome to the Insane Asylum".  Per your suggestion I have read all five parts two or three times each and during the reading, I started to feel calm and empowered. I have read the article on egoic mind you referenced in part 3. I noticed this egoic mind article was from February of this year- did you write anymore parts to the series?  How can I quickly and easily find articles you have written? All the methods I have tried are arduous and time consuming.  THANKS so much for sharing your personal journey in order to help us all in ours.

defender's picture

just copy/paste this into google.com:

site:zerohedge.com "submitted by: Cognitive Dissonance "

Carefull though, you might find yourself lacking sleep after reading all of the articals that show up.

Cognitive Dissonance's picture
UGrev's picture

#4 is the mother-of-all-truths. When the only people playing the game are the cheaters, there's no one left to cheat. The game stops cold. Well said. 


and a junk note, Bizarro world was not a Seinfeld creation and should never be referred to as such. For those who never read or watched a superman comic (and since there isn't a damn thing we can do about the market but watch it burn), I offer pure junk trivia: http://en.wikipedia.org/wiki/Bizarro_World

Budd Fox's picture

Well CD...that was sombering. But oh so true sounding.Truth has always a scary face...

hamurobby's picture

I agree all the way around.  The only solace I will have is, I tried hard, but no one would listen to chicken little. If one does not have a life boat seat, you better get one ready. I think I know how all the jelly dougnuts felt in August of 1944.

For those who have not had the pleasure to read CDs' "Welcome to the insane asylum", here's the link.



Ultranaut's picture

Thank you for sharing that. I'm part way through and thus far it is the most profound analysis of contemporary civilization I've read in years. 

saulysw's picture

CD : The question is .. how long until all of this happens? What's the timeframe here : Days, Weeks, Months, Years... Decades?? It's already gone on longer than I thought possible.

Cheyenne's picture

We've come a long way, CD, and in a short time. Two years ago your average Joe didn't know jack, nor, for that matter, did I.

Now I do, and in large part for comments like yours, which have an unusual resonance to them.

There hasn't been one day in the last 2 years I haven't blasted the big banks for their vile existence. For that I count 2--count 'em--converts.

But the greater satisfaction is watching ma and pa wake up. Which I see every week now in way or another.

People are pissed, and now--for the first time I've ever seen--they're not far off the mark.

Long story short: your efforts don't go to waste.

ex VRWC's picture

Will some old fashioned protest music from a ZHer help win a few converts?


Apostate's picture

Great comment, but I'm not as pessimistic. Not that I don't think the collapse will hurt... I just like to keep morale high, to increase our chances of winning.

If we think we're going to lose, then we'll certainly lose. If we retain some measure of confidence, then it fuels the struggle. 

Cognitive Dissonance's picture

Our course we will lose if we use their MEASURES and qualify our lives by their STANDARDS. How could we possibly "win" when the game is rigged and we are designed to lose when playing the game? While I won't be so stupid as to say "don't play their game" when we can never completely extract ourselves from their game, we can change our approach. I only "lose" if I care and want to "win" in their game. There are other ways of slicing the loaf of bread and still getting slices.

The problem is that as long as we cling to old ideas and methods, we (you and I) will never truly commit to finding new ways as long as there is hope we can "win" in their rigged game. Morale can still be high even with this understanding. Unless what you really desire to do is hope to actually throw out the bad guys so you can finally "win" in the rigged game. There will always be bad guys in this rigged game. Time for real change that we foment, not the game riggers to keep you stringing along

fallingman's picture

"The only way to get our society to truly change is to frighten people with the possibility of a catastrophe."
This has all been planned for so long ... from at least Fred Lee Crisman ... agent provocateur ... involvement at Maury Island.

The changing image of man is being manufactured from the shadows ... and what I haven't determined is ... if the shadows rule the banks ... or the banks own the shadows.


.:BB:. Blue Resonant Human ... RIP

Coldfire's picture

There are none so blind as those who will not see. Desperate men indeed. But on the other side I venture to guess that few will look at Wall Street, the state or the Fed the same way again.

StychoKiller's picture

"Cat's foot, Iron claw. 

Neurosurgeon's scream for more.

At paranoia's poison door... 21st Century Schizoid man.

Blood rack, barbed wire.

Politician's funeral pyre.

Innocents raped with napalm fire...21st Century Schizoid man."

-- King Crimson

Sean7k's picture

As good a sequence as any other possibility CD. 

The Depression was a terrible time that scarred the minds and emotions of a generation. Still, it was managed to great effect and for the greater good of the FED, corporations and unions. 

We survived the wreckage with a war that diminished the number of possible workers to improve employment, and the explosion of debt instruments for the next 60 years. Of course, it still took fifteen years to return to growth. 

This time may be different or not, but one thing I am sure of: any one with money in stocks, bonds or other traditional instruments will be punished. 

As for revolution, the greater population lacks the spirit and will. It has been drained away. 

Cognitive Dissonance's picture

As for revolution, the greater population lacks the spirit and will. It has been drained away. 

I understand your point and I'm not nit picking but rather adding. I watch how language is used by everyone, not just "them" or "they" but you and I. To say that the lack and spirit and will has been drained away almost sounds like we have been victimized, that "they" drained away our spirit and will.

I get a lot of flack here on ZH for saying what I'm about to say because many take the position that I'm blaming the victim. I always point out that in many cases we willingly victimize ourselves, that we make a bargain with the powers that be. Give me more of what your selling me for less cost and responsibility and I'll leave the driving to you. We willingly surrender our power to others in exchange for "things" or the illusion of "freedom" and "happiness" as currently defined.

And for the most part we have bought into this bargain hook line and sinker. We drained our own spirit and will and we have done so willingly and in exchange for false hopes and fleeting material possessions. Think about the American dream as presented by our TV, books, magazines and so on. Make it big, hit it rich, score the million dollars, hit the lotto ticket of life, marry the beautiful woman and handsome man, be "taken care of " for the rest of our lives and so on.

Where in all of that does our personal responsibility lay? One needs to think long and hard about what I mean by personal responsibility. Even this concept is more than just skin deep or satisfied by the standard dictionary definition.

ChevronSky's picture

"One among these is BNY's Nicholas Colas, who points out that due to the subliminal perception of record low stock dispersion (or liminal if such people read sites like Zero Hedge)..."

Hilarious TD!