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Market Correlations

Tyler Durden's picture





 

Due to the recent abnormal moves in the equity and credit markets, (anything lower should be considered quite abnormal), coupled with a vicious rebound in vol, we present some scatterplots which emphasize just how skewed (overpriced) the S&P is relative to the other correlation measures.

The first chart plots the S&P versus the on the run IG index. As seen from the red highlighted outlier dot, either equities are overprice by about 20 points or IF should be roughly 8 points tighter. As there has yet to be a case where credit is wrong at the expense of equity, look for a prompt 20 point downward correction in the S&P based on credit indications.

An analysis comparing a scatter between the S&P and the VIX shows an even more pronounced divergence from the trendline. If the VIX is correct, equities should be roughly 60 points lower, or else the VIX is overpriced by about 3 points.

Lastly, excluding equities from the scatter picture, and just plotting investment grade credit and volatility shows a much less pronounced divergence. Nonetheless, if the VIX is correct, one should expect a pretty substantial widening in IG credit spreads (which would likely push equities even lower). Alternatively, the VIX is likely overpriced per a knee-jerk reaction and is expected to drop a couple of points, although less than the S&P reading suggests.

With key GDP data out tomorrow, which is poised for a surprise unless Goldman was using dodecatuple reverse psychology, as well as the 50 DMA major technical support level breached, any additional push lower will likely exacerbate the S&P levels much lower as the various scatterplots attempt to adjust to hit recent trendlines. The next few days should be rather interesting from a market point of view.

 

 


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Thu, 10/29/2009 - 00:51 | Link to Comment Miles Kendig
Miles Kendig's picture

Great set up. Thanks.  Time to find out if the market has made a promise it cannot fill.

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Thu, 10/29/2009 - 01:17 | Link to Comment Fibozachi
Fibozachi's picture

The most recent multi-day thrust in the VIX n friends up and out of a fifth-of-a-fifth ending diagonal certainly proved to be quite impulsive over the past few days with a confluence of extremely bullish daily candlestick patterns and a marked re-expansion in average true range.  Today's exceedingly bearish price action and extreme market internal raedings suggest that further trouble lies immediately ahead for equity markets across the globe, which exhibit strikingly similar technical profiles with a multitude of ending diagonals and explicitly rising bearish wedge chart patterns.  On a fourth consecutive down day, today's TICK plotted an enormous amount of negative readings while registering a stunt low of -1422; marking only the seventh time that a tick reading below -1400 has registered since the very onset of Primary wave 2 (circle) began with a single daily High Wave candlestick on March 6th.  While 12 separate occasions of TICK readings that exceeded -1000 plotted over the course of yesterday's impulsive price action, VOLD also spiraled towards its lowest valueu since approximately 10/10/09 and 9/01/09; finding exact support at the trendline that connects the two.

Thu, 10/29/2009 - 01:18 | Link to Comment Anonymous
Thu, 10/29/2009 - 04:02 | Link to Comment Bear
Bear's picture

Two more down days and drop in bonds, we look like Oct. 19, 1987 and feel like 1933.

Thu, 10/29/2009 - 08:13 | Link to Comment Anonymous
Thu, 10/29/2009 - 08:18 | Link to Comment greased up deaf guy
greased up deaf guy's picture

very few technical indicators are volume-weighted, which makes this monster bear rally suspect at best and has led many chartists to dismiss their analysis altogether.

Thu, 10/29/2009 - 08:30 | Link to Comment Anonymous
Thu, 10/29/2009 - 10:19 | Link to Comment convexity
convexity's picture

Beware the trap of focusing on the OTR CDX spreads.  The basis has been compressing significantly since January.  i.e. MTD excess returns in cash credit is actually quite positive (92bps) try regressing the S&P against the cash index and you see a pretty over inflated credit market as well.  There are many reasons why CDX is painting a more negative picture.

Thu, 10/29/2009 - 10:45 | Link to Comment Grand Supercycle
Grand Supercycle's picture

 

VIX bullish bias continues ......

 

More:
http://www.zerohedge.com/forum/market-outlook-0

 

Tue, 09/07/2010 - 07:44 | Link to Comment loderbe
loderbe's picture

The basis has been compressing significantly since January.  i.e. MTD excess returns in cash credit is actually quite positive (92bps) try regressing the S&P against the cash index and you see a pretty over inflated credit market as well.

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