Stock Correlation in the S&P 500 is Nearing Black Monday Stock Market Crash Levels
Stocks react similarly to changing economic and market conditions. In investment terms, “Stock Correlation” describes the extent to which various types of investments respond in the same way.
Currently, the stock correlation in the S&P 500 has reached its highest level since the “Black Monday 1987” stock market crash, standing at 81% for September 2011 according to JPMorgan statistics.
The main thesis for this large stock correlation number — The U.S. slipping into recession and/or a financial crisis sparked by a European sovereign default.
In theory, individual stocks should move in individual directions based on company fundamentals but lately the markets have been consumed by waves of mass selling only to follow with waves of mass buying.
So what does this number mean? This means individual stocks are currently moving in the same direction 81% of the time.
When October 1987 arrived, the stock correlation number stood at 88% — only to be followed by a major stock market crash.
The collapse of Lehman Brothers moved the stock correlation number to 70% as did the Japanese earthquake.
Looking at what the historical average usually is — that would be 30%.
This unusually high level of stock correlation for September 2011 has raised speculation that markets could repeat the October 1987 stock market crash — an October 2011 stock market crash is on the radar according to some stock market technicians.
Tags: Black Monday, Black Monday 1987, Company Fundamentals, European Sovereign Default, Historical Average, Individual Stocks, Japanese Earthquake, JPMorgan, Lehman Brothers, October 1987, October 2011, Recession, S&P 500, September 2011, Speculation, Stock Correlation, Stock Market Crash, Stock Market Technicians, Thesis, Waves of Mass Selling