LIVE MARKETS-Stocks make a comeback amid cooling correlations

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STOCKS MAKE A COMEBACK AMID COOLING CORRELATIONS

On March 13, the S&P 500 index .SPX confirmed it was in a correction by ending down 10.13% from its February 19 record close. Since that low, the benchmark index has now bounced about 2.6% on a closing basis.

Meanwhile, with this renewed strength, bulls are heartened by deflating correlations:

On March 11, the CBOE implied correlation index .COR3M spiked to its highest level since August 5 of last year. August 5 marked the end of last summer's 8.5% SPX decline from its then record close on July 16.

The CBOE describes the COR3M as a "gauge of herd behavior." It measures the average expected correlation between the top 50 stocks in the S&P 500 index.

The COR3M tends to decline during advances and rise amid periods of market stress. Additionally, major turns in the correlation index can be violent.

On March 11, the COR3M ended at 28.94. Then, in a positive sign last week, despite the S&P 500 continuing down for two more days into its March 13 low, the COR3M declined to 26.60.

And now with market strength, the correlation index, which ended Thursday at 22.57, has broken back below its 10-day moving average (DMA), and fallen to its lowest level since March 5.

Bulls will want to see the COR3M remain below its 10-DMA, which ended Thursday at 25.21, and continue to trend down to add confidence in a sustained market recovery.

Higher correlation of individual shares (low dispersion) usually means stocks are moving more closely together, dimming benefits of diversification as well as stock picking skills.

(Terence Gabriel)

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