Equity Correlations Rise as Wall Street Decline Widens

Saqib Iqbal Ahmed reported.

NEW YORK (Reuters) - A stock market correlation index hit a nearly four-month high on Wednesday, signaling investors expect stocks to swing higher in the coming days.

The S&P 500 fell 0.58% on Wednesday, down nearly 5% from its all-time high hit in late March, while the Cboe 1-month implied correlation index rose as high as 21.79, its highest since late December.

According to LSEG, the Cboe Index, which measures the market's expectations for correlation among the components of the S&P 500, hovered below 10 points as recently as early April, a low rarely touched in the index's nearly 20-year history.

JJ Kinahan, CEO of IG North America and President of Tastytrade, an online brokerage, believes that the rise in correlation expectations is a sign that investors are preparing for volatility in the coming days.

However, Kinahan notes that the level of correlation is still low compared to history and that the recent uptick may be due to investors adjusting their portfolios in response to the recent uptick in volatility.

"Is this a cause for concern? It is ...... but it's not really panic time yet," Kinahan said.

The index is still well below the five-year median of about 35.

"Correlation levels have been historically low over the last two years, even below the levels we saw in 2017," said Mandy Xu, director of derivatives market intelligence at Cboe Global Markets.

"In order for volatility to oscillate higher, you need correlations to start rising," Xu says.

Where correlations are low, individual stocks tend to dampen the volatility of the index surface.

(Reporting by Saqib Iqbal Ahmed; Editing by Will Dunham)