Stock Correlation Is Soaring

As the Beatles once sang “All Together Now,” so it is for stocks. The Implied Correlation Index for the S&P 500 has been soaring lately. This means that the options market expects stocks to behave similarly.

The Chicago Board Options Exchange S&P 500 Implied Correlation Index posted its biggest gain in two years of data this week, sending its closing average since Oct. 11 to 78.21, according to data compiled by Bloomberg. That’s the highest level for the first 16 days of a reporting season, data show.

Traders are betting U.S. equities will move in unison as investors react to news about Europe’s attempts to end its debt crisis. More than 400 stocks in the S&P 500 moved in the same direction in three of the last four days. Investors first snapped up shares when Europe’s leaders agree to expand the region’s bailout fund and then fled equities when Greece said it would hold a referendum on the plan.

“It’s been brutal,” Philip Orlando, who helps oversee about $350 billion as chief equity market strategist at Federated Investors Inc. in New York, said in a phone interview yesterday. “October was easy. It’s a little more difficult now given this knee-jerk reaction to the stunning Greek development over the last 24 hours. A lot of folks like us are trying to get our hands around this and figure out what it means.”

The last time equities moved together to such a degree was in October 1987, when the index plunged a record 20 percent on Oct. 19, according to data compiled by New York-based JPMorgan Chase & Co. The Credit Suisse Fear Barometer, a gauge of prices to sell three-month S&P 500 calls while buying puts, soared 40 percent from Oct. 3 to Oct. 27 for the biggest gain during that period since November 2008.

Posted by on November 2nd, 2011 at 9:26 am


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