The chart below is the spread between the relative strength leaders and relative strength laggards (universe of mid and large cap stocks). When the chart is rising, relative strength leaders are performing better than relative strength laggards. As of 8/23/2010:
The waiting game continues. The RS Spread has been flat since August 2009. As we have pointed out before, RS leaders have performed much better than RS laggards over time and we expect that trend to continue. However, for the time being, RS leaders and RS laggards continue to generate similar performance.
Is there a chance that this lack of performace of leaders or laggards is related to the fact that cross correlation amonst stocks is now approaching 1? Regards. RR
I’ve seen a couple of articles that discuss rising correlations between certain asset classes, but I have not seen anything that suggests cross-correlation between stocks themselves is now approaching 1.0. Do you have data that shows this, or is that just an assertion that you heard elsewhere?
Dear Mike, here on bloomberg
http://www.mrswing.com/articles/Bloomberg_Hedge_Funds_Frozen_in_Headlights_as_Bipo.html
I have read several articles as well
also
http://online.wsj.com/article/SB10001424052748704258604575361022564322124.html?KEYWORDS=herd
Thanks for posting the articles. The WSJ article describes Birinyi’s calculation in some detail. First, he is not measuring the correlation between stocks. He is measuring the relationship between stocks and the index. Strictly speaking, he is not measuring correlation at all, only whether stocks are moving in the same direction as the index. (The article mentions that stocks moving in the opposite direction are not allowed to have negative correlations, which is not how the math actually works.) What Birinyi is actually saying is that when the index goes up, more stocks are up than is typical. And when the index goes down, more stocks are down than is typical. He is not making any assertion that the correlation between stocks is approaching 1.0. Judging from the chart, the periods with high levels correspond to high-volatility bottoms in the market. Great comment.