U.S. Intra-Stock Correlation At Highest Level Since 2011

Intra-stock correlation among the top 50 stocks in the S&P 500 is currently at its highest point since the 2011 European sovereign debt crisis. According to Citi analyst Tobias Levkovich, this phenomenon has likely created a lot of value in segments of the U.S. market.

The Brexit selloff was an excellent time to buy high-quality stocks on the dip, as most top names were sold off alongside low-quality names. The S&P 500 top 50 realized one-month correlation versus the S&P 500 is currently at 81 percent, a level last reached in December 2011. Not even the recession scare earlier this year resulted in such high a correlation.

Levkovich noted high correlation numbers have been a good bullish indicator in the past. In addition, Citi has seen anecdotal evidence from clients that market sentiment is extremely low, another typically bullish indicator.

Related Link: Just How 'Safe' Are U.S. Stocks Post-Brexit?

Despite Brexit-related economic slowdown fears, Citi is projecting that the S&P 500 will reach 2,250 by mid-2017.

“In this context, a 10 percent total return is not something to ignore when Treasury yields are in the 1.5 percent range and cash provides much less,” Levkovich explained.

Citi believes traders should focus on large cap U.S. value stocks, particularly financials, industrials, energy stocks and semiconductors.

Traders looking for a way to play large cap U.S. value stocks should consider the SPDR Dow Jones Industrial Average ETF DIA.

Disclosure: The author holds no position in the stocks mentioned.