This market signal called the tech selloff. Now it's sending another warning.

By Michael Kramer

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 current scenario suggests that even if the market rotation ends and technology comes back into favor for some time, that comeback is unlikely to persist indefinitely.

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 SPY to the Invesco S&P 500 Equal Weight ETF RSP 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.

What a break in the SPY-to-RSP ratio may mean

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 SPX 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.

SPY-to-RSP ratio

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.

Correlations increase

A contracting ratio suggests the market will likely become more correlated over time, meaning individual stocks within the S&P 500 are starting to move in the same direction. Going back to 1990, the 60-day rolling correlation between the S&P 500 index and the S&P 500 Equal Weight Index has never been lower. A correlation that has historically been around 1 fell to a low of just 0.56 on Nov. 3.

60-day rolling correlations of the S&P 500 and S&P 500 Equal Weight indexes

For the relationship between the two indexes - which measure the same S&P 500 stocks, just in different ways - to begin to rise back toward 1, the two indexes will need to start acting the same and moving in the same direction. If the ratio keeps breaking lower while correlation climbs back toward 1, the megacap stocks that have led much of this separate move will most likely be the ones to underperform.

The current scenario suggests that even if the market rotation ends and technology comes back into favor for some time, that comeback is unlikely to persist indefinitely, and the trade is may continue unwinding at some point in the future.

Implied correlations are low, too

The Cboe 3-Month Implied Correlation Index, which measures the relationship between option pricing in the top 50 stocks of the S&P 500, also suggests that market correlations have been extremely low recently. In fact, the 3-month implied correlation index hit a record low of 7.19 on July 10. Even with the recent spike in volatility VIX and the market selloff, that index remains at just 19. Implied correlations in the market on Friday suggested that correlations will remain low for some time longer.

Cboe 3-month Implied Correlation Index

Perhaps that is what makes this point in time and the market selloff on Nov. 5 so important - because of where the market now finds itself, which appears to be at a crossroads.

Either technology stocks will bounce and push higher, or the technology stock unwinding not only will continue but will likely continue violently, with correlations heading higher.

Michael Kramer is the founder of Mott Capital Management and a long-only investor focused on macroeconomic themes. He analyzes long-term macro trends and short-term market risk using technical analysis, fundamentals and options-market positioning. See here for further disclosures.

-Michael Kramer

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11-08-26 0700ET