Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
Excluding a day like yesterday, which brought us back to the frustrating days of “everything must be sold” or “everything must be bought” (what I call student body left trading), 2012 has seen a big improvement in terms of lack of correlation. This definitely brings some joy back in the market, as we have had so many periods since 2008 where it’s been all about guessing the direction of the market as a whole, and less about picking individual equities. WSJ Marketbeat brings us a chart showing how far correlations have dropped:
Earlier this week , as part of the WSJ first quarter wrap-up, we noted that correlations between asset classes – such as the U.S. dollar and stocks – have fallen from peaks hit late last year. But cross-asset correlations remain elevated compared to history. One only had to look to yesterday’s trading, where traders hit their big shiny red “risk off” buttons following a sloppy Spanish bond auction and all the way across the Atlantic, U.S. stocks had their second-worst day of the year.
We were curious where correlations between stocks stood compared to longer-term trends, so we asked Subramanian for more data. Turns out, correlations are really down a lot. A whole lot. They’re at below average levels for the last 26 years, and perhaps most eye-catching of all, they’re at levels not seen since late 2006 – in other words, before the financial crisis.
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Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund’s holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog
