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As Jill and I discussed in the video below, it's been fascinating to watch the swings in equity correlation over the last several months. Both realized correlation among the returns of S&P 500 components and changes in the forward-looking correlation implied by options markets give us some interesting things to watch.
CLICK HERE TO VIEW VIDEO
The average one-month correlation among S&P 500 components was actually higher in the fall of 2011 that at any point in the past five years, including during the 2008-2009 financial crisis. Then rally into the end of the year and in the first quarter of 2012 pushed stock correlation toward 40%, which is much lower than average. The flat-to-down trading in recent weeks has pushed overall realized market correlation back toward ordinary levels closer to 60%.
Right now, we're not at an extreme level of realized correlation in either direction, which means there is a mix of factors in play. One way we've been trading this type of market is by putting on both macro-focused trades and positions in stocks showing resilient momentum. For instance, we have positions open in CurrencyShares Euro Trust (FXE), CurrencyShares Japanese Yen Trust (FXY), and iShares Russell 2000 Index ETF (IWM), but also trades in specific stocks like Lowe's (LOW) and Yum! Brands (YUM).