Correlations closed the week at .8,  the 88th percentile of the past 15 years, and the volatility quake has lifted the entire correlation surface (from ten days to 200 days) into the red zone – indicating that volatility is here to stay.

The range of possible market outcomes extends significantly in both directions, and risk management here is paramount.  Pretty much every single metric you can think of in the market is hitting the 100th percentile and much of the data the report tracks had it hitting 100 percentile already on Monday.  When metrics at the hundred percentile fail to mean revert it becomes obvious something much larger is happening.

As such, we think that the risk shown in the red box below is not unfathomable – realized volatility between 50 and 80%, which is so rare it is practically impossible to predict (we are sitting at 25% as of Friday’s close – with lots of room to run, see the chart above.)

Last week we posted 99th percentile risk ranges and those were effectively completely disregarded by the market with price blowing through the 99th percentile on pretty much every day.  This week those ranges have widened considerably given the increase in correlation.  For reference to the below the SPY closed at 296.26 on Friday.  1 day downside 99th percentile is at 280.39 or about 5% below.  Ten days 99th percentile is 264.67 or about 11% below.

Below the 99th percentile (excess value at risk) is shown on our VaR forecast chart (circles below the green line):

This tells us in a true crash scenario over the coming 10 days, we would effectively trade back down to the 2018 lows in the 230 area.

Thanks and stay safe out there.

 

EN
ES EN