Tuesday, December 1, 2009

Correlations For DIA and SPY Have Gone Haywire in Late 2009

As another calendar month has ended, we are computing the correlations for hundreds of stocks. We have found some very interesting facts with DIA and SPY.

These is what has happened with the correlations between SPY and IWM/XLF/DIA throughout 2009, grouping data periods in 2 months groups. In other words, we look at the correlations in the period February and March, then March and April, and so on, all the way to October and November, so there is always one month overlap between two consecutive periods.

Note that startung in October the correlations between SPY and both IWM and XLF have dropped from the usual 90s range to just over 0.40.

For DIA it is even worse. These are the correlations for DIA:

Correlations between DIA and both of IWM and XLF have dropped from the 90s to under 0.20.

Correlations are very important for diversification. Based on the above data, one can conclude that lately the Dow Jones 30 and the S&P500 are diversified from the Russel 2000 and the financials.

This is bizarre to say the least. The Dow 30 is a useless index whcih we have discussed many times before. It can be easily manipulated. However, the S&P500 is a broad index that was supposed to be much more difficult to manipulate.

There is something here.

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