LIVE MARKETS-Cooling correlations have some traders sweating

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COOLING CORRELATIONS HAVE SOME TRADERS SWEATING

The S&P 500 .SPX ended Friday at 6,966.28. With this, the benchmark index scored its second record closing high so far this year (the SPX notched 39 record closing highs for all of 2025).

Meanwhile, since November 20, when the S&P 500 ended a 5% pullback from a record high, stock correlations have been deflating. Indeed, the CBOE implied correlation index .COR3M, which ended at 22.61 on November 20, finished Friday at 12.13.

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 ultimately prove to be violent.

Bulls have been heartened by the correlation index's recent downtrend. However, of note, on Friday, the COR3M ended at its lowest level since February 19, 2025. The SPX posted a record close on that day, prior to a 19% collapse into its April 8 closing low (coupled with a wild spike in the COR3M to 46.69).

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

In any event, the correlation index could continue to trend lower (its record low was at 7.63 on July 3, 2024). Additionally, a spike in correlations could prove to be reasonably contained.

That said, with the COR3M now at 12.13, traders are on alert. Since mid-2023, the three biggest SPX declines (July-October 2023, July-August 2024 and February-April 2025) were preceded by COR3M troughs in the 7.63-15.87 area.

(Terence Gabriel)

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