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Grab your magnifying glasses, we’re diving into a market mystery!
An unusual phenomenon has taken place in markets over the last few weeks or so…
A crash in correlation.
Let us unravel the potential reasons and implication☟
➠ Systemic Risk vs. Liquidity: The Whodunit
When correlations crash, it typically indicates declining systemic risk.
Thus, generating returns becomes more about stock picking than forecasting macro directions.
BUT, correlations can also break down when large spread trades are unwound in markets with less liquidity.
We previously mentioned short-covering taking place could drive prices higher, but yesterday, not only did this trend continue (with RTY rising), but longs (NDX) also experienced selling.
Could crashing correlations be signaling a market top and a low in volatility?
Time will tell.
➠ VIX & Term Structure: Navigating Market Signals
High dispersion explains why the VIX remains close to the lows near 14 and couldn’t rally in a market that appeared jittery over rising yields.
The VIX term structure has become much steeper again.
Which often hints at short-term vol complacency and may be the right time to consider downside hedges.
➠ Market Pivot or Picker’s Paradise?
Will markets face a turning point, or will stock pickers continue to thrive in this environment?
Stay tuned for ongoing insights as this correlation-crashing tale unfolds!
➠ Options Insight: Stay Ahead of the Curve
You can also keep an eye on this correlation dynamic with a free month of our in-depth analyses and investment strategies.
➠ Just follow the link in my bio, select your product of choice, navigate to check out, and enter RV2023
Then you’ll be all set for an entire month of free macro research and trade ideas sent directly to your inbox.
➠ In the meantime, get more color on the incoming correlation crash in this clip from today’s Macro Options Spotlight
➠ Then watch today’s full Spotlight video from the Options Insight YouTube Channel
Join the conversation and share your thoughts on this correlation conundrum!
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