Tuesday, December 20, 2016

The Falling Correlations

S&P 500 stock-correlation readings last week fell to their lowest levels in nearly a decade. The rolling 65-day correlation for S&P 500 stocks ended last week at 40 percent, the lowest absolute reading since 2007.

Correlation between individual stocks is a measure of their tendency to move up and down in unison regardless of their underlying fundamentals. Correlation is measured on a scale of 0 to 100 percent, where 0 means there is no relationship and 100 percent means they move together perfectly. The average correlation since 2009 is 60 percent.

When stocks are not highly correlated, that opens up opportunities for individual stock pickers to thrive. For example, just since the election, financial stocks on the S&P 500 have climbed 17 percent, while utilities are down by more than 1 percent.

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