High Correlation and Downward Momentum

History never repeats itself but it rhymes

-- Mark Twain

Talking about some statistics of the market, here are some good facts to know from Bloomberg

• High Correlation

Stocks in the S&P 500 are moving in lockstep with each other by the most since at least 1990, a sign that the market's biggest retreat in three years may not be over, according to MF Global Holdings Ltd. The average correlation coefficient between the 500 companies and the index was 0.8268 on Aug. 18, using 60 days of data, according to MF Global.

High correlation is usually the case in a bear market, when investors are liquidating equities as an asset class, Craig Peskin, co-head of technical analysis at the New York- based firm, wrote in an e-mail on Aug. 18. In a bull market, when investors are differentiating, we see low or falling correlation.

Correlation among S&P 500 stocks exceeded 0.78 twice previously, according to MF Global. After the first time, on Dec. 1, 2008, the S&P 500 declined 17 percent to a 12-year low on March 9, 2009. Correlation peaked again on July 26, 2010, when the benchmark slipped 6.1 percent over the next month, data compiled by MF Global and Bloomberg show.

• The momentum of downward spiral

History shows the S&P 500 may keep sinking. The index plunged 16 percent between July 25 and Aug. 8. The eight declines of that size over similar amounts of time since 1928 led to additional losses averaging 17 percent, according to data compiled by Bespoke Investment Group LLC, a Harrison, New York- based research company.