Reuters / Michael Buholzer
S&P 500 intra-sector correlation is close to its
lowest on record, showing that industries within the index have
been trading independently of one another.
The offsetting nature of S&P 500 sector moves has
been particularly pronounced in the past week as traders rotate
out of tech and into financials and telecom.
The next time someone you know conflates low stock market
volatility with an overall
lack of excitement around equities, be sure to point them to the chart
It shows that intra-sector correlation — or the degree to which
industries in the benchmark S&P 500 index trade independently
of one another — sits close to its lowest on record. Weaker only
during the tech bubble, the measure suggests that trading has
been heavily polarized on a sector basis.
One of the main reasons that overall market price swings have
been subdued — with the CBOE Volatility Index, or VIX, sitting close
to its lowest ever for much of 2017 — is that these sector
fluctuations have offset one another. So while your friend has
repeatedly bemoaned the lack of trading opportunities in a
low-volatility environment, the truth is that there have been
shifts happening at the industry level.
This dynamic has been in play for much of the past week, which
has coincided with the above measure’s drop to fresh multiyear
lows. On Monday, the S&P 500 slid by less than 0.1% as tech
stocks, which have led the market higher for much of the year,
lost nearly 2%. Balancing that out were gains of more than 1.5%
in financial and telecom stocks.
It also perfectly encapsulated trading late last week, in the
lead-up to the Senate’s successful passing of the GOP tax bill, when traders
drove a so-called rotation out of expensive tech positions to
finance purchases of lagging sectors like — you guessed it —
financials and telecom. This was especially pronounced on
November 29, when the tech-heavy Nasdaq 100 dropped 1.7%, while the
S&P 500 was little changed.
“The extreme sector dispersion explains why index moves have been
so muted this year, as the market has really been driven by
sector rotation,” the equity derivatives strategist Mandy Xu
wrote in a client note.
With that in mind, it looks as if low-volatility truthers may
need to find a new excuse for their underperforming portfolios.