Implied Correlation

US-Europe Decoupling At All Time Record As SovX - Implied Correlation Spread Indicates Historic Domestic Complacency

In last night daily report by BofA's Jeffrey Rosenberg, one chart stands out: the spread between the 12 month S&P 500 top 50 Implied Correlation (generically a proxy of broad US equity risk) and the Sov X, or the blended sovereign risk as indicated by CDS, which recently hit an all time high. In a nutshell: the spread has never been bigger, confirming that US domestic complacency over all things European (and the continuing levitation in stocks) has reached unprecedented levels, as absolutely no fundamentals can stand in the path of the hedge fund levered beta year end rally. In other words the China-US fatally flawed "decoupling" of 2007 has been replaced with a decoupling between the US and Europe. This will also end in tears. And this is happening even as European markets are unraveling, and as the EURUSD is tumbling, guaranteeing a drop in both US exports and the top line for US MNCs. But why worry: as 58 year old Valerie Whelan yesterday summarized it best: "It's capitalism gone mad." Every move in risk assets higher is merely a bet that central bankers can kick the can down the road for one more day. Nothing else. That it is unsustainable is guaranteed. Willem Buiter makes the case all too clearly that Europe will go bankrupt soon. We expect someone to make the same argument about the US very soon, especially if China does in fact commence tightening, leaving the chairman no other choice than to open the liquidity floodgates in one last attempt to preserve the dying economic system, however, this time without the benefit of being able to export inflation to China.

Another Historic Milestone Passed As Implied Correlation Hits New Record

The 10 Year under 2.5%, Bunds, Gilts, JGBs all following suit to record risk-aversion levels, the EURCHF at record lows, the USDJPY at 15 year lows, and now this: the CBOE Implied Correlation index has just hit another historic plateau, touching on 85 earlier in the day, which means that all those who believe relative value can still be found are about to be carted off. Aside from the fact that the current level of JCJ would be the highest closing level in history, the intraday high of 84.50 is a very troubling indicator, which once again confirms that stocks continue to trade not on fundamentals, and probably not on technicals, but on ever increasing amount of leverage applied to some indication of beta. Essentially, market participants are likely levered to the gills like never before and betting it all on another daily Hail Mary. Another way of looking at the reading, as we have pointed out previously, is that stock dispersion: the most critical indicator of a healthy market, is at 15%! And let's not forget we are currently still in the H.O. regime (and to all naysayers we remind that the market has dropped almost 4% since the first Hindenburg Omen appeared). So many coincident records, can hardly be a coincidence... We look forward to getting Matt Rothman's thoughts on this increasingly disturbing trend, and for the NYT to pick up on this theme within 4-6 weeks.

Implied Correlation Closes At All Time Record High

It was only Wednesday when we were lamenting the collapse of alpha after implied correlation hit an all time intraday high of just under 80. Well, today should be the day when all long/short funds are shutting down: implied corr just closed at an all time record high of 79.57, after also posting an absolute intraday record of 80.08. It is getting ever more obvious that stocks continue to trade more and more as just one asset class, as seen by the constant increase in JCJ below, which has risen almost 15% in this week alone. At this rate, every stock will trade just like every other stock in under 3 weeks when alpha is officially put to rest and stock dispersion has undergone an extinction level event (better known as HFT and ETF encroachment, in which it is the price that determines value and not the other way around).

Surging Implied Correlation Tells An Ominous Tale

Over the last 3 days implied correlation has surged back to extreme levels as professional investors once again see rising correlation throughout 2010 - traditionally seen as an alternative reading to the VIX as amarket crash predictor. With the VIX still sustained at artificially low levels, keep a close eye on this indicator.

Daily Credit Summary: November 10 - Basel Tov

Spreads were mixed to slightly tighter in the major indices today despite negative breadth in single-names. HY outperformed IG as both indices saw inside days amid low volumes pre-holiday tomorrow. Financials outperformed non-financials but the financials were off their best levels by the close (as we suspect some concerns over Bair's Basel II Bumblings started to be taken seriously).

Implied Correlation Hits New Six Month High

The implied correlation reading between all asset classes has hit a 6 month high at 65.50, a jump which mimics the surge in the VIX. High implied correlation readings are indicative of crash risk expectations.

Daily Credit Summary: October 7 - Nifty Thrifty

Spreads were wider in the major indices today as single-names actually led the way weaker today and high beta underperformed low beta with wideners outpacing tighteners by almost 8-to-1. Credit continues to underperform stocks and a lifting in compression trades today and strength in TSYs suggests far less confidence in the recovery in fixed income investors than equity investors.

Weekly Credit Summary: August 28

Credit underperformed equities this week as single-name tighteners edged wideners by four-to-three leaving indices (especially HY) underperforming intrinsics in general. CONSumer and ENRG names underperformed as TMT and FINLs were best with INDUstrials mixed. Financials outperformed non-financials but the strength in the former was more at the tails of the distribution while the weakness in the latter was more broad-based.

Implied Correlation Breaking Out

Could it be that after several months, the "sophisticated" investors are betting on a high-correlated event? One thing to keep in mind as one follows the meanderings of the VIX.

With VIX Failing To Respond, Investors Getting Long Correlations

With the VIX - S&P intraday correlations now broken on a daily basis, investors are now going long equity option implied correlation (factor linking individual member vols to index vols). With the VIX openly gamed, is the ICJ now the relevant indicator for portfolio insurance?

Daily Credit Summary: July 29 - Range Day

Spreads were mostly tighter in the US today with HVOL outperforming IG (pushing ExHVOL wider) but HY continuing its rally (albeit with both IG and HY in extremely narrow intraday ranges of 3 and 25bps respectively). Indices generally outperformed intrinsics with skews mostly narrower (although not enough to warrant index arb expectations as we saw IG/HVOL9 underperforming IG/HVOL12 on further CIT/SLM/monoline weakness and suspected correlation book hedging) as IG underperformed but narrowed the skew, HVOL outperformed but widened the skew, ExHVOL intrinsics beat and narrowed the skew, XO's skew increased as the index outperformed, and HY outperformed but narrowed the skew.

Glimmers Of A Return To Normalcy In Quantitative Strategies?

The last time Matt Rothman did a holistic analysis of the market two months ago, he observed market dispersion which was at October 1987 levels: investors were buying anything and everything indiscriminately. In his latest Quantitiative Strategies observations, Rothman is noticing a slight return to normalcy as finally there is a slight discrimination between various asset classes. Whether this will persist, now that potential program trading disruptive elements may have been removed (even if temporarily) or whether the return of the 3:30pm SPY/ES microblock buying sprees will result in this fledgling flight to fundamentals being aborted, only the next few weeks will demonstrate.

Putting The Low Volume Rally In Context

Zero Hedge has previously discussed the aberration effects of daily gaps (up and down) as well as trading volume on the true state of market fair value indications. We present some VWAP (Volume-Weighted Average Price) data for our readers based on SPY index price and volume levels. We end up with some interesting conclusions.