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Lack Of Stock Dispersion Hits All Time Record As Most Stocks Now Trade As One
Fundamental analysis is no longer relevant as Alpha has just done one more revolution in its grave: today 1 Year Implied Correlation hit a new all time record, at 79.84 (out of 100 maximum possible), meaning the inverse of the metric, stock dispersion, or the measurement of the variation in individual stock prices, or broadly speaking alpha, is now completely irrelevant. As we have been saying for a year, "investing" is now all about a levered beta bet, using the maximum possible leverage, and sacrifices to Moloch, that the market does not turn before price targets are hit. At this rate we anticipate the next broad or acute selloff, will take us to 100 in implied correlation, at which point there will be no benefit whatsoever to trading individual stocks: the entire market will be one big ETF.
As a clarification: the data comes from the CBOE S&P 500 Implied Correlation Index is a widely disseminated, market-based estimate of the average
correlation of the stocks that comprise the S&P 500 Index. Using SPX options prices, together with the prices of options on the 50 largest stocks in
the SPX. Tied to January 2011 Option Maturities.
h/t Credit Trader
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I wonder what the data would show on an international basis.
Same, from what I am hearing - but that market is OTC only the CBOE has the published index. European correlation has been lower than US because of the somewhat natural dispersion between Germany and Spain, for example.
yes the CBOE does.
wish BIDU would trade along with the broader market.
Its not correlating and my puts are under water.
PG = C = KO = FNM ....... I'm all in ,sounds fun.
What's wrong about that? Makes investing so much easier.
Can the implied correlation index go higher than 100 if skynet discovers HFT warp drive?
Yes it can, as it's based only on option prices not realised correlation. However SPX gamma would be fairly expensive when that happens.
that would be good for my current long gamma trade...
Right...That's why Boeing, for instance is up 41% over a 1 year period while the Dow is up 11%. There's no difference between any stock or the market, as proven by my shiny fancy Excel chart.
This doesn't mean ALL stocks all day every day forever. It means on the day measured using the parameters listed.
Did you do too much Bo(ei)ng ?
This should be expected.. who would own a stock that can't be sold/bought until the nyse opens while all the hft games and sunday night desisions get priced in before joe blow has a chance to take action.. the only thing left to trade is /ES via globex with stops if you don't want to get your head handed to you.
Rigged stocks proves Vegas is a 'sure thing easy win odds in your favor' gamble by comparison. Besides, in vegas you get scantily clad women, free drinks, and all you can eat crab legs.
The sad part is, confidence is completely gone from the markets, any talk of 'regaining investor confidence' is delusional, theyre ruined forever.
The ONLY way investor confidence could ever be restored is if all these people From Bernanke on down were arrested and hanged. Even then it would be a very tentative lengthy rebuild.
US markets dead, R.I.P.
Whoa... don't go too far over that cliff, cowboy.
Let's agree what market is bereft of confidence, and that TPTB have earned the negative consequences from that.
Let's agree about the "regaining investor confidence" thing. Under this current regime, I think the efforts to rekindle confidence by intervening and propping up markets was a terribly delusional thing. They would have gotten more mileage from keeping the markets transparent and restraining the influence of HFT trading.
But ruined FOREVER? C'mon... all it takes is for a true leader to come in and press the shiny red reset button to get investors to come back. It may not be tommorrow, next week, or even next year... but eventually, there will be an overhaul that will bring investors back.
Azh nazg durbatulûk,
Azh nazg gimbatul,
Azh nazg thrakatulûk,
Agh burzum-ishi krimpatul.
...In the land of Mordor, where the shadow lies.
just for precision's sake, it's not 1 year implied correlation that you're showing - it's the implied correlation for the jan 2011 spx options (so the time window is contracting as you move from left to right on the graph). At this point, that figure is the IC for the top 50 SPX stocks for the next 5 months roughly.
It should also be noted that IC is not the same as realized correlations - IC is simply the weighted average correlation which must be realized (until expiration) by the underlying stock returns comprising the index to make the price of the Index Option consistent with the prices of the individual stock options. When you buy/sell an Index Option you are buying/selling both volatility and correlation - IC is a measure of how expensive the correlation part of that equation is. (and it's really f'ing expensive right now...)
I see--so it behaves more like an implied vol spread, or a relative-value indicator between options on the index and options on its biggest constituents.
Is this due to increased demand for leveraged exposure to the index (i.e., for protecting against downside risk via puts) or depth in single names drying up?
How I miss Benjamin Graham.....wasn't investing about finding value .
except for nflx, of course.
and BIDU.
and BLOKA.pk
Or, when 20% of the Nasdaq is AAPL, same deal.
i would double check that as the beta for apple to the NQ is certainly not one...
http://www.zerohedge.com/article/apple-representing-20-weighting-nasdaq-...
As troubling, the top 10 of this purported "index" makes up 49%.
Not tough to figure out, most of the retail clients that used to invest in stocks, have all moved to gty'd 4-6% annuities, and ran from stocks and funds, and anything having to do with the market.
Now its just human pro traders getting run over by faster and better CPU HFT Pro traders, and all of us just use ETFs to trade. Its better than having headline risk, but the problem for other people is that all stocks trade as one.
While we are on such a technical subject, GS top trade close to stop at 30....
from FlyOnTheWall:
08-11 17:38: CBOE Volatility Index Futures; August at 25.55, September at 29.15 1 more leg down and they are out. Again.If correlations are approaching 1 and at record high levels, then the machines are giving a great opportunity to spot longs/shorts, for implementation when the market returns to a more normal phase. I realise thats probably too big an ask, of course, but in theory, the opportunity is there
Seems like the market froze right at 1090ish, then the PPT started buying up anything and everything.
My charts says 1088.62 was the stick save location. Of course, the supposed line in the sand is 1088.01 or there abouts. They can save it a few times but this puppy is going lower. People were looking for a reason to sell. The Fed gave it to them. We may even have a relief bounce tomorrow. Won't last. Wait until selling volume takes hold.
Something I've noticed from my clients over the past few weeks are worried phone calls asking to sell some winners because they're worried about cap gains tax increases next year. I can't be the only broker getting these calls.
This is a great indicator of how disconnected our financial markets are from the purposes envisioned by their creators.
This is a fatal condition given time. Money and the current financial technologies and designs upon which it depends have become cancerous. It's perverse in its incentives and its distribution. No organism can long survive such poor management of its own metabolism... Though the tumor will THRIVE for some period of time. "Money" (whether in currencies, gold, land titles or some related form) serves as an allocator of 'social energy'. It is a central driver of individual and group action. Hence... money is political in its very foundations! (Which is why the separation of politics and economics is asinine on its face... as is the idea of a <i>neutral</i> Fed or any other economic body). Finance is an essential technology for co-ordinating and driving decision in any civilization larger than a hunter-gatherer band. However it is NOT the only driver... nor are economic metrics always the best measure of 'social metabolism'. Our globalized system of finance is broken and corrupt... and often very far away from the market fundamentals which are supposed to be its master. For an interesting example see this: The Food Bubble: How Wall Street Starved Millions and Got Away With It: http://bit.ly/9ShbKa It relies on faulty systems of credit and currency creation which have seriously biased and distorted decisions. This is not some pale dream that we should all sing Kumbiyah and give up such an essential technology... but rather that improved metrics of social metabolism are urgently needed... as are new mechanisms for the allocation and storage of the social energy* which is the true underlying key to the metabolism of a civilization. social energy: individual and collective decisions operating within the limits of available resources and natural law which (quite literally) result in the product you see as a civilization. A decision here is defined as an idea + an action. Decisions can be motivated by any number of factors. We are lacking the tools needed to abet the utilization of vast amounts of wasted, unused and discouraged human capability. Money and the Machinery of Representation http://culturalengineer.blogspot.com/2010/07/money-and-machinery-of-repr... Personal Democracy: Disruption as an Enlightenment Essential http://culturalengineer.blogspot.com/2010/06/personal-democracy-disrupti...CBOE S&P 500 Implied Correlation 2011 (JCJ index) is hitting high at 78.91
CBOE S&P 500 Implied Correlation 2010 (JCJ index) is hitting low at 46.86
Anyone care to decipher what they means?
Great thread. Excellent comments, all.
Regards
not just the market. every asset and every non-USD currency in the world (except maybe yen) is one big ETF. USD up, all assets+currencies down. USD down, all assets+currencies up. So simple this way. except that people are still referring to owning equities and other assets as the “risk” trade, with the implied notion that cash (especially USD) is the opposite. anyone holding cash these days feeling like that isn’t a risky position?
I think CNBC's Cramer said "Buy!" after the Fed announcement. I just looked and we're down over 2%.
Nice call, Jim. Booooooooyaaaah.
WWCD?
We are driving on the Autobahn
In front of us is a wide valley
The sun is shining with glittering rays
The driving strip is a grey track
White stripes, green edge
We are switching the radio on
From the speaker it sounds:
We are driving on the Autobahn
http://tinyurl.com/37czlr2
Excellent post Credit Trader. Kudos to you.
I'm also thinking that we'll have a lack of "asset dispersion" when all asset classes will basically trade as one. I know that sounds anathema to even renowned bears such as Rosie, but when demand falls heavily, everything ('cept probably the FRN toilet paper) will move down.
DOW/SP500 daily charts are now bearish.
So the downtrend I first mentioned in early May this year, can now resume.
http://stockmarket618.wordpress.com