Momentum Mayhem
What goes up, must come down
The indicator of the moment is implied correlation.
A corrective move in the market, even a brief pause that refreshes such as a 3 to 5 percentage point plunge over the course of one to three days, usually resets implied correlation into double digits.
This time is not like the others. Something larger is brewing because the bulls aren’t backing off.
ZeroHedge has been running headlines such as this one today: “Signs Of Panic”: Goldman Derivs Guru Warns AI Credit Blowout Spilling Over To Entire Market
Normally, the headlines are too late or come in the midst of panic, but there’s no panic in the technicals.
Momentum was obliterated, but it hasn’t spooked the bulls at all. They speak of rotation, not selling. Implied correlation tells us “the market” is still betting heavily on the individual names driving the S&P 500 Index higher.
Even the idea of momentum destruction seems a bit comical. Here’s an ETF focused on the momentum factor. I have drawn a symmetric continuation of the pattern were it to top. The peak to trough drop was 15 percent, not insubstantial yet also not exactly a shocker.
What’s more interesting is what happens when I overlay semiconductors onto the momentum fund:
QQQ is less correlated, SPY even less so:
The market looks complacent.