And You Thought The Correlation Bubble Popped

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 |  Includes: DIA, EFA, IGV, IHF, IWM, IYH, IYJ, IYM, IYR, IYT, JPM, KBE, KCE, KIE, KOL, KRE, MDY, MOO, MTK, OIH, PPH, QQQ, RWR, USO, XES, XLB, XLF, XLK, XLY, XRT
by: Todd Campbell

If you were happy to see the correlation bubble pop this spring, I have bad news. It's back. Just when we thought stock picking would return, fear has ETFs moving in lock-step again.

Blame Europe

The return of highly correlated markets should be blamed on Europe. Why not? Everything else is being blamed on them.

Fears of Grexit were reborn just ahead of the typical summer swoon. And, for good measure JPMorgan's (NYSE:JPM) disaster derivatives bet provided just the excuse everyone wanted to risk-off following Q1's risk on stampede.

The following table shows the most positively correlated ETFs to the SPY this year.

ETF's Positively Correlated to SPY

ETF

Correlation

YTD Return

XLF

0.98

5.79%

DIA

0.98

2.26%

MTK

0.98

5.62%

QQQ

0.98

9.42%

XLK

0.98

8.55%

IGV

0.97

10.87%

KIE

0.96

6.35%

MDY

0.95

6.03%

XRT

0.95

12.70%

KBE

0.94

8.11%

XLY

0.94

10.50%

KCE

0.93

3.83%

KRE

0.92

7.87%

Click to enlarge

So, out of 50 or so widely traded ETFs, 13 had positive correlations to the SPY.

Now, let's look at correlations this month. Forty have positive correlations of 0.90 or higher. And, while I cut off the list at 90, gold and silver bugs aren't seeing much benefit either. Their correlations are 0.83 and 0.88, respectively.

ETF's Positively Correlated to SPY

ETF

Correlation

MTD Return

DIA

1.00

-4.74%

IYJ

0.99

-5.50%

IYM

0.99

-8.74%

QQQ

0.99

-6.91%

XLB

0.99

-6.93%

IWM

0.99

-5.93%

KCE

0.99

-9.51%

XLK

0.99

-6.34%

XLY

0.99

-4.96%

XLI

0.99

-5.00%

IHF

0.99

-4.66%

XES

0.99

-10.62%

MOO

0.99

-9.59%

MDY

0.98

-5.31%

EFA

0.98

-10.20%

XLF

0.98

-8.81%

XLE

0.98

-8.14%

XME

0.98

-15.19%

SMH

0.98

-10.32%

XOP

0.98

-13.73%

MTK

0.98

-10.46%

KOL

0.97

-18.69%

KBE

0.97

-5.94%

OIH

0.97

-10.07%

PPH

0.97

-4.71%

IGV

0.97

-6.91%

XSD

0.97

-11.72%

XLV

0.97

-2.67%

XRT

0.96

-4.28%

KRE

0.96

-4.24%

USO

0.96

-13.66%

KIE

0.96

-5.23%

XPH

0.95

-3.62%

IYH

0.95

-2.46%

IYT

0.93

-1.89%

DBC

0.93

-8.62%

XLP

0.93

-0.76%

RWR

0.91

-3.91%

IYR

0.91

-3.57%

XHB

0.90

-2.65%

Click to enlarge

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.