High Sector Correlation Provides Slight Encouragement

by: TickerSense

Picking winners is becoming increasingly difficult, and picking sectors is now almost useless. The chart below shows the average correlation of each S&P 500 stock with the S&P 500 index on a rolling 200 day basis. As shown, beginning in the middle of September, members became much more correlated with the market and have remained at high levels since then.

Stock correlation
Moving up to the sector level, there are no areas that stand out. A traditional long/short, market neutral strategy is useless in this kind of environment. Even holding stocks overnight is risky on the long or the short side.
Avg sector correlation

One encouraging note is that this is the first occurrence of such high sector correlation in a bear market. Bear markets are shaded in the chart above, and as shown, correlation generally rises during a bear market, and peaks afterwards.