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S&P 500 RALLY PAUSES AS CORRELATIONS FLASH EARLY WARNING

The S&P 500 .SPX hit a bit of a pause on Wednesday, dipping 0.74% to finish at 7,553.68. It wasn’t a huge drop, but it was enough to bring an end to a strong nine-day winning streak. That kind of run doesn’t happen often -- the last time the index rallied for more than nine straight sessions was a 12-day stretch that wrapped up back in September 1995.

Now, attention is shifting to an even bigger streak that could be on the line: the S&P 500’s nine-week run of gains. As of now, it’s down about 0.35% for the week, which puts that streak at risk of ending as well. For perspective, the last nine-week winning streak came as recently as December 2023, but to find a longer one, you have to look all the way back to a 12-week streak that ended in December 1985.

Meanwhile, there’s been an interesting development under the hood. Since March 30 -- when the S&P 500 bounced back from a 9% pullback -- stock correlations have been dropping sharply. The Cboe Implied Correlation Index .COR3M, often described as a “herd behavior” gauge, has fallen from 34.51 on March 30 to just 8.1 as of Tuesday, its lowest level since mid-July 2024.

In simple terms, that decline suggests stocks have been moving more independently rather than in lockstep. That’s typically a positive sign during a rally and tends to favor stock pickers.

Still, there are a few early signs worth watching. The correlation index edged up slightly on Wednesday to 8.38. It’s not a big move, but it raises the question of whether the recent downtrend in correlation might be starting to reverse.

That matters because, over the past couple of years, notable market pullbacks -- averaging around 9% -- have often come after correlation bottoms in this same range. Add in the extended daily and weekly win streaks, and it’s no surprise traders are questioning whether the market is getting a bit stretched to the upside.

(Terence Gabriel)

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