Correlations between individual stocks recently hit a record low, and a reversion to the mean may not be a good thing for the market The slow-burning rotation that has been taking place, and that has mostly gone unnoticed, has suddenly woken up. One can’t say it was a surprise to see the stock market sell off like it did on Nov. 5, given how low correlations in the market had gotten. It was only a matter of time before the market started to revert to the mean.
When correlations are low, it means a rising tide is no longer lifting all boats, like it normally would. The ratio of the SPDR S&P 500 ETF Trust to the Invesco S&P 500 Equal Weight ETF nearly called the peak of the technology rotation and its unwinding. Now that same ratio is reaching its next crucial level, one that is either going to lead to a rotation back into technology and megacapitalization stocks or perhaps lead to the unwinding of the entire market.
Either way, wild price swings and more volatility likely lie ahead. Don’t Short Yourself offers weekly money tips to help you earn it, stack it and grow it. I would like to receive updates and special offers from Dow Jones and affiliates.
I can unsubscribe at any time. The SPY-to-RSP ratio has reached the very lower end of the range it has remained within since June 2025. Whether it breaks down, with the ratio contracting further, or rises and expands remains to be seen, but one can’t overstate how critical that lower bound has become.
The S&P 500 index gives companies with the largest market capitalizations greater weight than smaller companies. Meanwhile, the S&P 500 Equal Weight Index gives each company the same weighting. As a result, the SPY-to-RSP ratio can measure whether those larger weights are helping or hurting the S&P 500 index.
A break lower in the ratio means the SPY continues to underperform the RSP, but it doesn’t tell us how. It may mean SPY drops and RSP drops less, SPY falls and RSP rises, or SPY rises and RSP rises more. But given how much the technology sector and megacap stocks have powered the artificial-intelligence trade and driven the market, it suggests AI is the underperforming group again.
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