Below is a chart of sector correlations versus the SPY going back to 2011. You can see how they rise during periods of S&P pullbacks/drawdowns. During this most recent pullback in which we are about 4.2% off the highs, correlations have started to rise. Since the start of 2013 when this V-bottom market of shallow corrections really kicked into gear, the average pullback in the S&P 500 is 4.5%. Considering we are 4.2% off the highs with rising correlations and a ton of oversold indicators, we give a higher probability to a potential bounce. So unless we get a bigger flush lower in prices, correlations are likely to stay in this range of .7 to .8 before correcting lower.
A recent note from the morning briefing by Nicholas Colas, the chief market strategist at Convergex, sums up the current environment:
He goes on to list a number of keen observations:
It will be important in coming weeks to observe how correlations react as the market carves its path. Will it be more of the same and we're reaching an inflection point in both correlations and volatility? Or will individual sectors begin to behave a bit more independently when volatility flares up?