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A market adrift, tied to nothing, confusing everybody

Dilemma confused
George Marks | Retrofile | Getty Images

In January, one of the prevailing market themes was the tight correlation between oil prices and the stock market. But now no such correlation exists, with the market simply adrift, correlated to nothing.

Stocks are just doing their own thing, which is why they've been so confusing for traders over the last few weeks. It's an environment that could be conducive to stock pickers but rough on trend followers.

Back in January, oil and stocks moved so tightly together that the close of oil at 2:30 p.m. ET would be the only opportunity for stocks to behave independently. You could see it in the intraday charts. Everything before that point was mainly oil-driven. Eventually that phase passed.

Later, the drama over Brexit and interest rates moved the market. That world has ended, too.

Now, there really is no particular driving factor.

CNBC ran a variety of correlations between the S&P 500 and other major market movers. There was not a single high-value correlation with any of those trades. And that included looking at the one-, two-, three- and four-month correlations. Nothing stood out.

Good time to be a stock picker

We looked at various commodities, currencies, bonds, etc. There wasn't a single asset that had a correlation with the S&P 500 above 0.67 (or below -0.67) in the four time periods. (A reading of 1 indicates a perfectly correlated asset that moves in tandem with the index, while -1 denotes one that moves in exactly the opposite direction.)

The two highest correlations were with the British pound: in the three- and four-month time periods. Clearly that's because of the lingering effects of Brexit earlier in that window. But in the last two months, that effect has disappeared.

That's why stocks have left traders so confused. Nobody knows what they're tied to, and nobody has a good sense for where they're going.

This environment is actually good for stock pickers.

Low correlations allow different stocks to behave in a variety of ways, without the large overhang of a broad macro environment. When correlations reach one, that's when all markets move the same, and individual stock picks won't have much value.

That's why an environment like this is posing trouble for the trend traders — there is no trend to spot. But for the traders who can separate good stocks from bad, this could be their time to profit.