The overall weakness has abated this week, but only after chopping everyone to bits before the massive Friday rally. Despite this rally, however, the model score is stuck at -84. This means – that risk spreads are not improving and much caution is indeed still warranted. As such, we heed our models warnings and are still invested 100% in risk-off TLT. As previously eluded to in this post, and this post, we noted that huge one day returns could be expected at such a deep negative model score.
We still believe that name of the game has changed from Growth to Capital Preservation. We continue to emphasize that the spread model is not meant to pick bottoms or tops, we use it for trend following purposes – to keep investors out of the worst of the worst, and to keep investors in for the bulk of the best.
In this post – we showed that in the most extreme market conditions markets experience contagion across many correlation timeframes. The following picture is an update to a public blog post on the DOW30 correlations – namely to show that while we are seeing increased correlations on a shorter term basis with the 10 day correlations sitting at 82%, we still have not seen major contagion across the longer term time frames – yet. We aim to bring these sorts of visualizations and data analytics to you on a daily basis.
Thanks and have a good week.