Correlations closed the week .62. 2020/2021 has been a story of bottoming on low (not extreme) correlation.
What has been driving that? Implied volatility blows out. With fewer people shorting volatility the spread between implieds and realized remains wide. Whenever the spread is this wide, it has historically marked intermediate term bottoms.
We think two scenarios are at play here. Either we retest the lows and make new lows and bounce again, or we don’t look back at all. In either scenario we think the r/r on a 3m 60 day timeframe remains positive, this is what the probabilities suggest. Here is the evidence:
The mean return is skewed positive vs anytime at 5.25% vs 2.68%. The left tail is about -20% not as extreme as the anytime data, but definitely can’t be ignored. The right tail is massive. 80% of the time we end higher in 3 months. Recent signals shown below.
That is all for now, have a great week.