Stock Correlations Soar To 97.2%: Here's Why

Tyler Durden's picture

One of the parallel consequences of the market plunging (although nowhere near as far as it would had central bankers not be ubiquitously present to cushion every blow) in the past month on fears of another Great Financial Crisis, coupled with concerns of global insolvency, has been a surge in stock correlations (if not so much between stocks and other risk assets such as bonds and gold), to the highest point since the Lehman collapse. Putting a number to the "point" - 97.2%. Here is how BNY Convergex' Nicholas Colas summarizes the recent surge in cross sector correlations: "Disparate markets – stocks, bonds, currencies, and the like – have a lot in common lately. Whether they want to or not. Average correlations between the 10 major sectors of the S&P 500 have reached 97.2%, from 82.1% just three months ago. That’s the highest level of such common price action since the Financial Crisis. Gold and silver have continued to provide actual diversification, and Investment Grade bonds are also holding their own in this regard. They are at least moving on their own, rather than lockstep with the rest of the world. The difference between investing in Emerging Markets equities, Developed Markets equities, and High Yield bonds is now effectively zero. We think these high correlations will plague markets through the end of the year, since they are fundamentally caused by worries over European financial market solvency. Those aren’t going away any times soon." Well, they might, if someone actually believes the lies spewed by European bankocrats, who have now reached new lows in dealing with information, by sicing regulators against those who write OpEds. Very soon the dissemination of facts will also be made illegal, but until then, we will likely see correlations continue to trade, and soon hit 1.000 as everything trades in perfect lockstep with every other robot traded "thing."

From Colas:

  • U.S. stocks seem to be walking the picket lines in front of the capital markets, chanting in unison. Well, not literally, of course. But just look at the correlations between the 10 industry sectors of the S&P 500. At 97.2% average correlation, U.S. stocks are moving in lock step to a degree we haven’t seen since the depth of the Financial Crisis. This is not the normal course of business, to say the least. More commonly, some stocks go up while others decline.
  • Many other asset classes are apparently siding with stocks, and moving alongside them – sort of a sympathy strike. These include High Yield Bonds (which have many equity-like financial characteristics but are, ultimately, not stocks), the Australia Dollar, and developed as well as emerging economy stock markets.
  • The only assets that still have some independence left in them – call them the rugged individualists – are gold and silver. These precious metals still show negative correlations to stocks (negative 55% for gold and negative 35% for silver).

This trend has been forming for months, so I have had some time to consider what might be going on. Here’s my brief take:

  • The correlations we note among industry sectors are profoundly and dysfunctionally high. They come, in my opinion, from the underlying concern over a second financial crisis caused by the default of Greek or other European sovereign debt and the resulting stress caused to the financial system. The only reason it won’t matter whether you own utility stocks or tech stocks or health care stocks is if the world’s major banks can’t open for business the next day.
  • Stock markets around the world, but especially in the U.S. and Europe, are trying to fine tune this existential calculus. If there is a 5% chance of a Greek default, then where should stocks trade? OK… Now how about 10%? Now 20%? Now back to 5%? Now what if U.S. banks need another bailout because their counterparty exposure is higher than we think? You get the idea. Markets are trying to discount the survival rate of another cross-border financial pandemic. That is why they move in lock step.
  • Gold and silver traders have gotten too used to the negative correlation trade with stocks. This is, in fact, an unusual relationship for precious metals to stocks. The correlation should actually be zero. You can begin to hear the frustration in traders’ voices on days like Monday, when gold doesn’t rally on a drop in the market. Here’s a news flash: it is not supposed to move opposite to stocks. It is only supposed to move independently of them.
  • The stability of high quality bonds (we use the iShares iBoxx Investment Grade Corp ETF, symbol LQD, to track this asset class) in a tumultuous period has been unexpected and frankly impressive. Investment grade bonds are still up over 4% on the year, and their correlation to stocks is negative 24%. Not as inversely related as the precious metals stats I noted above, but far better than the 89% correlation to stocks exhibited by High Yield Bonds.
  • If the basic thesis here is correct – that correlations will stay high as long as markets are worried about solvency more than individual stock fundamentals – then we probably have several more months of lock-step price action. And with this comes high volatility, for many of the same reasons.

And the above in pictures:

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Godisanhftbot's picture

 Its nauseating. Why bother trading stocks at all.

Dr. Richard Head's picture

It was so nauseating that in 2008 I encountered dry heaves.  Consequently I have calmed my stomach by not having one red cent in stocks at all.  I will leave trading to the computers - they have iron guts.

wombats's picture

No, actually their guts are made from copper, silver and a little bit of gold.

MarketTruth's picture

Why bother? Because the HFT computers need to steal those pennies and front-run you so as to 'add liquditiy' to 'the market'. C'mon, get with the program and support Goldman Sachs, JP Morgans, etc HFT computers and make as many trades as you can.



Buy phyiscal gold and silver, then sit back and enjoy the fireworks as countries and US cities implode.

Smiddywesson's picture

There's a time to trade stocks, and a time not to trade stocks. 

Ditto for bonds, and commodities.

There's also a time to sit in cash, or to flee to precious metals.  I would say this is one of those times.

mayhem_korner's picture

Why bother trading stocks at all.

Improper use of plural.  It is currently "stock"...

long-shorty's picture

someone forgot to tell AUD/JPY that everything is better now.

Cdad's picture

You can also see the jackles moving in on AUD/USD.

long-shorty's picture

I hope so. I, for one, am tired of hearing how awesome China is.

Cdad's picture

I assure are not alone in your opinion of China...

long-shorty's picture

CLF puts today = more fiat tomorrow.

SheepDog-One's picture

Markets now completely taken over by robots, so why shouldnt there be any surprise about near total correlation moves in all things, no matter how much they may not be related to each other at all?

Cdad's picture

Yep...assless jeans, coal, diamonds, oil, burritos, gold...perfect harmony there.  Brilliant capital allocation.

I'm sure "investors" are lining up to buy crap equities from a just short of jailed syndicate of criminal bankers...any minute now...a fevered rush of retail buyers...holding my breath.


SheepDog-One's picture

Of course now we get the 'BIG UPS' to deep in the green across all markets for no plausible reason at all....GEE a funny thing happened on the way to the sure-thing baked in QE3 delivery.

long-shorty's picture

where can I buy my wife a pair of these assless jeans? that sounds like pretty excellent allocation of capital if you ask me.

monopoly's picture

Good post. That is partly why I never trade this market and have not shorted either.

SheepDog-One's picture

The elite bankster overlord lunatics can play with each other, Im watching this fiasco from the nosebleed seats.

Belarus's picture

All why you have to throw fundamental analysis away. With a 1;1 correlation moving money around doens't matter at the margins" it has to be either long, short/straddle, call, put on indices if you're going play the suckers game. Nothing else matters....

Except for looking at the1970s just perhaps: where it was Silver, Gold, Oil, and PM stocks, in just that order, that gave one true alpha. Everything else was just noise; ditto--this centrally planned nightmare.

xtop23's picture

Why is the relationship between gold / silver and stocks unusual ? I always thought it made perfect sense for risk-on risk-off to trigger flights to or from safe havens or ETF's / financials / equities etc ?

This is not the norm ?

SheepDog-One's picture

Huh.....well anyway, Ive been risk on for a while stocking ammo and food.

rgd's picture

Does anyone know if Eric Janzsen (iTullip) restructed his portfolio.  He was long gold and Treasuries, but hinted on getting out of one or both and putting it elsewhere.  Thanks

SheepDog-One's picture

I was just doing lines of coke with Eric off a hookers ass last nite, he says treasuries are for dorks.

adr's picture

They markets have been completely taken over by algos today. Look at the action in the charts, the moves are totally synthetic. How in the hell is the Nasdaq trading that much higher than the DOW?

Pull up a chart that shows two minute price action and run your mouse across it. Nearly every move up has been followed by a minuscule decline and then a further move up. Same with the moves down in inverse. The S&P oscillated between 1171 and 1172 for fifteen straight minutes jumping up and down a point on every tick! Look at that 20 point move in the morning, have you ever seen a jump with jagged edges like that?

Perhaps all that wacky behavior we saw in individual stocks over the past few months really were trial runs to turn the entire market over to a couple computers.

SheepDog-One's picture

Ramping stocks into hurricane force show need for QE3 delivery next week? 

Something is about to blow up big time here.

adr's picture

I agree but what? Frickin SodaStream is up about 20% since the start of September defying all logic.

I guess there isn't a single trader out there that has been in a store noticing that nobody is actually buying the thing and the machines are on clearance everywhere. They were able to show great growth because so many mass retailers bought a ton of the machines expecting to sell them. Now they are all sitting on the inventory looking to unload at firesale prices. I expect one hell of a black friday special on SodaStream product.

When the market is taken over by computers that drive the market up 1% on a single rumor headline, how can it be stopped. We should have sold off to S&P 900 by now but the market keeps going. I think they are just letting it go because they can't shut the computers down. It is the only thing keeping the lights on at this point.

With correlation running at 97% that means there is only 3% left that actually pump blood through their veins. Imagine the catastrophic loos in volume if the computers are unplugged.

learning2's picture

I was thinking today how the Dow, NASDAQ and S&P 500 sure were looking like the same patterns that Gold and Silver were displaying for the past year or so, but not so recently since China opened up. Thought it was weird...just sayin.

Hedgetard55's picture

How is it possible to have such high correlations? What is the mechanism?

Deadpool's picture

step 1: inject money into system

step 2: buy shit

result; prices of everything go up together eventually like George Michael fans in a hot tub.

Greater Fool's picture

Put simply, a bunch of stat arb machines are sitting out there with single-name betas to various things--the index, one another, etc.--and looking for opportunities to pairs trade or do more exotic things so they can profit if a breakdown in betas is only temporary.

Wonderfully, the first to trade such a combination pushes it ever so slightly back into line. The second pushes it a bit more in the same direction, and so on. As long as more or less everyone is more or less in agreement as to what the betas ought to be, that's what the betas are. To build new models or test their existing ones, they examine recent data and discover that, lo, the betas are pretty darn stable and therefore the risks of such strategies look fairly low.

In other words, you have a world in which non-news-related price shocks in an individual name (that's "specific risk"; you exclude it from your backtesting and design the strategy to avoid names at times when they are moving on news rather than established patterns) are propagated through the whole fabric of equities almost instantaneously.

On one hand, this should have the effect of mitigating liquidity problems in individual names (as long as they are an accident of timing rather than a consequence of something real), by in essence transferring liquidity from places where it is in excess to places where it is lacking. In that sense, it's a rather beautiful arrangement. On the other hand, any system that hideously interconnected is pretty much bound to go horribly haywire someday. (Hello, flash crash....)

Denver768's picture

Once the machines have squeezed the carbon-based traders from the market, the machines will dictate where the market goes and when...  HFT firms will reap whatever profits they want.. and momentum rats will chase the crumbs.

Who controls the past controls the future: who controls the present controls the past.   -- George Orwell, 1984

MichaelG's picture

Who controls the milliseconds controls the hours and days?

Smiddywesson's picture

Of course everything is correlated.  When Bernanke shocks the patient with the paddles, everything jumps, and then goes back to being dead.

mick_richfield's picture

St. Vitus' Dance, illuminated by St. Elmo's Fire.

Sounds like my kind of party.

Deadpool's picture

Correlate, good times! come on! It's a correlation! there's a party goin' on right here, a correlation to last thru out the year. Cor-a-late, good times! come on!

SheepDog-One's picture

Last hurrah rampjob before next weeks Bernank QE3 faceplant.

CvlDobd's picture

Could it be that the machines agree with most here and are doing all they can to protect us from QE3 madness?

See law 1 of robotics.

A robot may not injure a human being or, through inaction, allow a human being to come to harm.

See they are saving us from FED harm!

MichaelG's picture

Fairly sure all these robots are non-Asimov-compliant. Timmy Geithner certainly isn't.

alien-IQ's picture

here's another perfect correlation:

/ES up 1.00%
$DXY down .97%

who woulda thunk it?

SheepDog-One's picture

And there goes Bernank's last cushion to QE on, rising dollar. No more.

Racer's picture

The world's 'markets' just follow the apple

adr's picture

Look at the chart for oil today. Where the fuck is the SEC???????

Seriously, something really F'd up is going on. Specifically from about 2:00-2:15. Something stupid crazy went on during that 15 minutes.

Downtoolong's picture

I swear, if someone did finally manage to invent perpetual motion today they would have a hard time finding backers to develop it for more than a week. If Greece defaults, the investors would probably bail on the idea and buy gold.  

Srgato's picture

Can anyone shed light on the strengthening of the dollar?  Are there intelligent theories on how long it will continue?  Assuming Europe's going bad, what effect does a good (strong) PRC (China) have on the dollar?  Doesn't the strengthening dollar make Bernacke's intervention less likely?  What other sites are focusing on this issue? 

zerohedge is the best site for financial information which I have found to date--I'm keeping current on about a dozen and have looked, one time or another, at a hundred.  Below is an Emirati site that had a sensible post on gold today.  It's the first site from that area that I thought might be useful to consult (use the "business" tab).  Here's a link:

JW n FL's picture



Markets are trying to discount the survival rate of another cross-border financial pandemic. That is why they move in lock step.

  • Gold and silver traders have gotten too used to the negative correlation trade with stocks.
  • And thennnn??? No and Then!

    Waterfallsparkles's picture

    Last Monday and this Monday it is so evident that the Fed is in the Market.  Especially, yesterdays huge pump at 2:00.

    Bernanke so loves the short squeezes.

    Aapl from $272.  (yesterday low) straight up to $386. todays high.

    Sina from $101. (yesterdays low) straight up to $114. todays high.

    All high Beta stocks.

    Yep, the Fed at work.

    Hulk's picture

    $372 on the aapl low , not $272...