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Correlation Deflation! Risk Model : 3 - Beta up

Correlation Deflation

One of the hallmarks of an aging bull market is a drop in correlation. In its initial stages, a market cycle is characterized by broad-based moves, as a rising tide floats all boats. The current U.S. market is exhibiting the opposite condition as fewer and fewer stocks are confirming the recent move.

The VIX collapse, combined with the rapid rotational move back into Growth Stock leadership has caused active managers to age rapidly, as they lag the market and re-appraise their career choices.

Low realized volatility is not been the consensus call. The skew between puts and calls is negatively slanted. Protection products continue to see record inflows. I believe these low volatility strategies are self-reinforcing. This is the legacy of the "bull market in pessimism" that we have had to endure since the '08 crisis.

It's ironic that, since last summer's Brexit head-fake, the market's most "volatile" days have been mostly to the upside. The highly misleading"fear index" has created the mother of all crowded trades in the wrong place.

Bull markets don't die with good earnings momentum such as we now have. Expensive bonds and real estate offer little competition, either from valuation or yield. Other than the brick and mortar retail sector, earnings have been better than feared despite the weaker macro data. That, combined with a low 10yr yield has put the "TINA" bid back in charge.

The narrowness of the recent advance is troubling but understandable. That doesn't make it either easy to beat or comfortable to play.

As to the risk model: we have lost both the Bull/Bear ratio and the Copper/Gold indicator. This condition is supportive of a non-cyclical, defensive, but positive posture. Boring is back!

So for a stock pick that lets you you sleep at night:


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