By Saqib Iqbal Ahmed
NEW YORK (Reuters) – A stock market correlation index hit a near four-month high on Wednesday, signaling that investors expect stock market gyrations to tick up in coming days.
With the S&P 500 slipping 0.58% on Wednesday, down nearly 5% from the record high touched in late March, the Cboe 1-Month Implied Correlation Index rose as high as 21.79, its highest since late December.
The Cboe index, which measures the market’s expectations of correlation between S&P 500 index components, was languishing below 10 as recently as the start of April, lows rarely touched in the index’s near two-decade history, according to LSEG data.
The rise in correlation expectations points to investors gearing up for some more volatility in the days ahead, according to JJ Kinahan, CEO of IG North America and president of online broker Tastytrade.
Kinahan, however, noted that correlation levels still remain low compared to history, and the recent uptick may be due to investors adjusting portfolios in response to the recent rise in volatility.
“Does it bear watching? Of course … but it isn’t really panic time,” Kinahan said.
The index remains well below its five-year median reading of around 35.
“Over the past two years, correlation levels have been historically muted, even lower than what we saw in 2017,” said Mandy Xu, head of derivatives market intelligence at Cboe Global Markets.
“In order for volatility to shock higher, you need correlations to start picking up,” Xu said.
When correlation is low and individual stocks are charting their own paths, it tends to subdue index level volatility.
(Reporting by Saqib Iqbal Ahmed; Editing by Will Dunham)