Low S&P 500/Nasdaq-100 Correlation Positive For the Market

The 60-day correlation between S&P 500 and Nasdaq-100 has dropped to levels reached along the 2000s uptrend. Although correlation can be dubious measure, current low levels may indicate that there is potential in the market for further gains.

Below is a chart of the 0-lag, 60-day correlation between SPY and QQQ:

The drop in the correlation started in September of last year and accelerated after the election in November. As it may be seen from the above chart, the 0.774 60-day correlation between SPY and QQQ is at 2005 – 2006 levels.

This may be positive for the market in the following sense: When S&P 500 falls, Nasdaq-100 may rise and provides support to the broader market and the other way around. For example, yesterday SPY fell 0.3% but QQQ rose by about the same percentage.

Note that no statistically significant conclusions can be made from the above observations because market dynamics always change and the past may not be a good guide for the future in many cases. However, it is always a good idea to look at divergences because they can provide some indication of a prevailing trend.

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