Risky Parity Panic Strikes As Correlations Crash To Record Low - Zero Hedge

Risky Parity Panic Strikes As Correlations Crash To Record Low | Zero Hedge 11/24/16, 2:08 AM
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Risky Parity Panic Strikes As

Correlations Crash To Record Low
by Tyler Durden
Nov 23, 2016 8:00 PM
3
SHARES
Having exploded higher in the run-up to the election, market

expectations of the correlation between stocks within the S&P
500 have completely collapsed since to new record lows.
search zerohedge Submit
!
Simply put, massive systemic overlays were placed ahead of the
election event, and were forced to be unwound increasingly
aggressively as the post-Trump rally caught everyone offside (the
unwind would mean relatively heavy selling of Index protection
ADVERTISEMENT relative to single-name protection). ADVERTISEMENT
As a reminder, implied correlation measures the relative demand for

macro overlays (index hedges) vs micro risk (individual stock
hedges/concerns). The higher it is, the more systemically worried

investors are and the more traders believe a high correlation New Comments +
'event' is due (typically the high correlation event is a big downturn
Today's Top Stories +
in stocks).
As The Wall Street Journal reports, sectors and styles in the S&P
500 index have started to move independently after seven years
http://www.zerohedge.com/news/2016-11-23/risky-parity-panic-strikes-correlations-crash-record-low Page 1 of 5
As The Wall Street Journal reports, sectors and styles in the S&P
500 index have started to move independently after seven years
of depressed volatility and tighter correlations.
What's this?
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1 pip spreads, 500:1
While the S&P 500 climbed to a record for a second day on Tuesday,
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there are elements of a bull market and a bear market at the leverage. Awarded "Best
same time, said Andrew Wilkinson, chief market analyst at
Log in Interactive Brokers. Forex Broker Europe"
Youre seeing pressure on different sectors. In a gcitrading.com
typical bull market, youre going to get all stocks
Zero Hedge Reads going higher.
It makes it very interesting for the stock picker and the

Acting Man
active manager whos on his game, Mr. Wilkinson said.
Alt-Market Contact Information +
Benzinga
Boom Bust Blog The relationship between growth and value stocks in Suggested Reading +
Capitalist Exploits the benchmark equity measure has also decoupled,
China Financial Markets with the rolling correlation between the two groups
Chris Martenson's Blog
Contrary Investor sliding since voting day, FactSet data show. A
Daneric's Elliott Waves Republican sweep of the U.S. presidency and Congress
Dr. Housing Bubble has boosted the inflation outlook, pushing investors RanSquawk News +
ETF Daily News into value names. Before the election, investors crowded The Fly +
ETF Digest
Economica
into growth companies in 2015 amid a sluggish
economy and then poured money into low-volatility Benzinga Pro +
Financial Revolutionist
First Rebuttal equities in the first half of this year.
ForexLive
Fundist
ADVERTISEMENT
Gains Pains & Capital But it is not just correlations between individual stocks that is
Hedge Accordingly
crashing. The correlation between bonds and stocks has
Implode-Explode
Investing Contrarian collapsed back to its norms... PARTNER CENTER TODAY'S OFFERS
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Which, as we noted previously, is raising notable concerns over a
Wolf Street risk-parity fund blow up. As BofA warns: "Latent risk remains
worth monitoring, as (i) leverage is still near max levels across a
variety of risk parity parametrizations, (ii) bond allocations are
ADVERTISEMENT historically elevated, and (iii) markets continue to be sceptical of
a 2016 Fed hike." More From ZeroHedge

Why Are Goldman Insiders Dumping Stock At
If BofA is correct, it would mean that a day which sees a The Fastest Rate In 5 Years? | Zero Hedge
-4% SPX drop and +1% bond rally (good diversification) Former CEO Of UBS And Credit Suisse: "Central
would generate no selling pressure, "underscoring Banks Are Past The Point Of No Return, It Will
All End In A Crash" | Zero Hedge
would generate no selling pressure, "underscoring

the critical role played by bond-equity correlation in All End In A Crash" | Zero Hedge
governing the severity of risk parity unwinds." 14 Dead, 17 Wounded In Mass Shooting;
Suspects Reportedly US Citizens (2 Dead, 3rd
Detained) | Zero Hedge
However, a troubling scenario is one where even a
relatively benign 2% selloff of the S&P coupled with FBI Said To Move To "Likely Indictment" Of
just a 1% selloff of the 10Y could result in up to 50% Clinton Foundation, Fox News Reports | Zero
Hedge
deleveraging, which in turn would accelerate further
liquidations by other comparable funds, and lead to a Major Foreign Policy Shift: Turkey Abandoning
EU For SCO | Zero Hedge
self-fulfilling crash across asset classes.
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Which incidentally sounds like precisely the scenario
that could happen when the Fed tries to raise rates, and
is also why asset classes continue to move without fear
of any rate hike, as they now realize - very well - just
how trapped the Fed truly is. That said, in short order, Free Forex Demo
we will see if the Fed, for once, has the intestinal
fortitude to actually raise rates in the face of the
extreme volatility awaiting equities in the event they
1 pip spreads, 500:1
do... we doubt it.
leverage. Awarded "Best
As RBC's Charlie McElligott notes, the classic risk-parity pain- Forex Broker Europe"
trade ensues-- developed mkt sovereign bonds, stocks, EM, credit
and commodities (ex-crude) all under the cosh right now at the gcitrading.com
same time (shocker--a strategy built on a core concept of
negative correlation btwn bonds and risk stocks is going to be
exposed in a regime change of this magnitude).
And as the chart below shows, Risk Parity funds are plunging...
As is clear, he massive decoupling between stocks and risk-parity

funds is not unpredented... but has not ended well in the past (for
stocks).
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Risky Parity Panic Strikes As Correlations Crash To Record Low | Zero Hedge 11/24/16, 2:08 AM

Risky Parity Panic Strikes As

Having exploded higher in the run-up to the election, market

As a reminder, implied correlation measures the relative demand for

hedges/concerns). The higher it is, the more systemically worried

Top 10 reasons to invest in income MarketViews

HOME CONTRIBUTORS NEWSLETTER MORE "

Password: * Free Forex Demo

It makes it very interesting for the stock picker and the

a 2016 Fed hike." More From ZeroHedge

would generate no selling pressure, "underscoring

As is clear, he massive decoupling between stocks and risk-parity

Baltimore Firm Has Billy Bush Caught All 51 Tom Hanks

These 100 Do You Know the Diseases Affecting

Sponsored Stories More Stories You

Warning! This game is Trump Terrors - A

U.S. Presidents Who The NYT Is Live Tweeting

Click Here to Sign Up for the Front-Running Newsletter and have

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