The CBOE S&P 500 Implied Correlation Index is pushing to lows not seen since just before the implosion of Lehman Brothers in September of 2008. The Implied Correlation Index tells us what the options markets are implying will be the degree to which stocks (in this case, the 50 largest S&P 500 components) move together as one. Just as implied volatility is an estimate of what future volatility will be, so implied correlation is a prediction about likely future movements of stocks together. The lower the Index trades the more individual stocks and market sectors begin to move independently again. This would indicate investors are becoming more optimistic about the future of the economy. The fact the Index is drifting toward the 40 area provides further evidence that investors are focusing more on individual companies and less on index-level risk scenarios.

Eoin Treacy's view My view – Correlation between sectors and across risk assets generally has resulted in the risk-on, risk-off parlance that pervades commentary. There is little doubt that the rise of high frequency trading and the extraordinarily loose monetary policy followed by most major central banks contribute to this condition. Since there is little evidence that either of these factors has changed then it is reasonable to look elsewhere for the reasons behind the recent fall in correlation between large cap equities.

The large liquid stocks that contribute to the CBOE S&P500 Implied Correlation 2013 have been among some of the best performers over the last year, not least because they often offer competitive yields and exposure to the growth of the global consumer. As the obvious advantages of a higher yield from a total return perspective are increasingly appreciated, their respective ability to sustain payouts requires that they be addressed on their individual merits.

An additional aspect is that this Index refers to options expiring in 2013. As we approach expiry for at least some of the reference vehicles, there is the potential that they are also being traded on their individual merits.

When we examine the Index's performance, price action has deteriorated and is testing a former area of support. This overlay of the Index with the S&P 500 suggests that correlation spikes higher during market declines. The fact that the correlation index is has firmed in the region of a previous area of support suggests an additional degree of caution is probably warranted with regard to the wider market.