MarketWatch: “A sign of ‘excessive market confidence’ could spell trouble for stocks over next 2 months”

By datatrekresearch in IN THE NEWS

Excerpt from MarketWatch quoting DataTrek co-founder Nick Colas:

.... "U.S. stocks may face a challenging time in the next two months, as the correlations between the S&P 500 sector indexes and the main index are extremely low, according to a report Tuesday by Nicholas Colas, co-founder of DataTrek Research.  

The S&P 500 SPX’s sector correlations to the index measure how much industry fundamentals impact stock prices relative to macroeconomic factors, such as interest rates or recession risks. 

When the correlation is high, or above 0.92, the markets are focused on macroeconomic factors such as the Federal Reserve’s monetary policy or geopolitical shocks, which have the potential to drag down economic growth. In that case, every sector could see lower earnings. 

When the correlation is low, or below 0.74, investors are emphasizing industry and stock fundamentals, indicating that they don’t see any clear macro risk factors to cause decline in economic growth in the near term.

While low correlation often points to a relatively healthy economy, the reading is currently too low, standing at 0.61, noted Colas. “This is a potential warning sign about excessive market confidence,” Colas wrote. 

For the last five times such a correlation fell below average, the S&P 500 dropped by an average of 1.5% over the following 50 days, noted Colas"....

Full article here on MarketWatch.