Investors, brace yourselves. A market pullback may be coming soon.
The intrastock correlation between the 50-largest S&P 500 components by market capitalization — including high-flying technology stocks like Apple and Amazon— has dropped to the mid-teens, suggesting “the potential for a coming dip in share prices,” Tobias Levkovich, U.S. chief equity strategist at Citi, said in a note Thursday.
U.S. stocks have been red hot this year, with the S&P climbing nearly 9 percent, led largely by a surge in the technology and health care sectors.
But “when fund managers feel a bit too excited about equities, excessive confidence can be seen via the comfort of being extraordinarily micro focused and comfortable buying individual names (such that correlation drops to very low levels),” Levkovich said.
“In the past, such low correlation readings have preceded stock index weakness. Indeed, it is often best to step up aggressively when correlation is north of 70% and to back off when readings dip below 20%,” he said.