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Monday, November 2, 2009

Correlation Across Stocks Spikes w/ Sell-Off

Zerohedge shows an interesting chart, though the explanation of what it is... is well, wrong. Zerohedge states:

The implied correlation reading between all asset classes has hit a 6 month high at 65.50, a jump which mimics the surge in the VIX. High implied correlation readings are indicative of crash risk/expectations.
Actually the ICJ index they detail does not show the implied correlation between all asset classes, just the narrower sectors that make up the S&P 500. Per the CBOE:

The CBOE will disseminate two indexes tied to two different maturities – January 2010 (“ICJ”) and January 2011 (“JCJ”). Both ICJ and JCJ are measures of the expected average correlation of price returns of S&P 500 Index components, implied through SPX option prices and prices of single-stock options on the 50 largest components of the SPX.

That said, the chart is interesting in that it shows the correlation of the various sectors of the S&P 500 approaches one during sell-offs (important for those who believe they are getting diversification by investing in an index vs. individual stocks). In addition, the recent sell-off has been slightly more broad than previous "mini-corrections" we have experienced over the previous 6-7 months.

Source: Bloomberg