VIDEO: Implied Correlations And The Death Of RO-RO

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by: Topdown Charts

Summary

The CBOE Implied Correlation Index, like the VIX, is derived from option prices on S&P500 stocks.

The implied correlation index has fallen to the lowest level since 2007, and this could be a warning sign of a short-term market top.

The trend in realized correlations shows a complete transition from the "Risk On - Risk Off" environment of 2008-13.

In this video we look at the CBOE Implied Correlation Index and the general evolution of correlations for the S&P500 and what it means for traders and investors. Specifically, the video walks you through a couple of slides of a recent edition of the Weekly Macro Themes report.

In the video we talk through how the Implied Correlation Index can be used as a market timing indicator, as well as gleaning insights on the broader prevailing market regime. We also take a look at the implied correlation index in relation to historical realized average pair-wise correlations across the sectors of the S&P500 and discover an interesting development.

Realized correlations have dropped to extreme low levels last seen around the peak of the dot com bubble - an important point which we talk through in the video. We also note how the implied correlation index has likewise fallen to levels last seen around the 2007 market top. From a market timing stand point the implied correlation index is 'implying' a risk of a short-term market top.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.