Market Correlations

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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