S&P 500, DAX Look Parting Ways , Could Be Bad For Wall Street

While U.S. and German stocks have tended to move in tandem in the past, there has been a disruption recently that could be a sign of trouble for Wall Street.

For the first time since mid-2015, the 50-day correlation between the S&P SPX, +0.01%  and DAX 30 DAX, -0.37%  has gone negative, points out MKM Partner’s Jonathan Krinsky, in a note to clients. He said this has only happened five times in the last 20 years — June 1998, Feb. 2000, October 2005, August 2015 and April 2015.

“Four of the five occurrences preceded medium to large market pullbacks (‘98, ‘00, ‘14, ‘15), with ‘00 preceding the end of the tech bubble and ‘15 preceding the August flash crash,” said Krinsky.

As the bottom of the above chart shows, that 50-day correlation has moved to negative -0.327. A negative correlation suggests the underlying currents driving the global markets may have shifted, and investors can no longer simply assume that a rising tide will lift all boats.

Krinsky did make note of the point, though, that while in 1998, the S&P 500 fell 19% from July to August, there was a 5% rally before that. “In other words, even if the signal is accurate, it’s not always timely,” he said.

Year-to-date, the DAX is up nearly 6%, while the S&P 500 has surged 10.43%. European stocks have been a lure for investors this year, with investors inspired by signs of growth, falling unemployment and growing wages.

The above chart is just one of several signals that chartists and other strategists have been picking up on lately as potential bad omens for U.S. stocks. Earlier this month, market technician Tom McClellan was pointing to a narrowing yield spread between 10-year German bunds TMBMKDE-10Y, +0.44%  and their U.S. counterpart TMUBMUSD10Y, -0.19% That spread, is still tightening, sitting at 1.76 percentage points currently.

According to McClellan, a widening in the spread has in the past been a market condition that has correlated with higher moves for U.S. stock indexes.