Correlations ended the week at .77 and the SPY ended unchanged, though a change of character was noted – the SPY sold off on the unemployment number day for the first time.

While correlations continue to curl, they have not come down meaningfully, .77 is the 78th percentile in the past 15 years.  Correlations are also off the lows of the move (pink dot on the x axis), consistent with VIX picking up near the end of the week.

The VIX-30 Day Realized spread has now flattened completely.  This means that any continued up move in VIX results in a highly positive spread/  During the downturn in March, a highly positive spread lead to vicious one day bounces before compressing the spread – which basically pinged back and forth before the SPY made a bottom with the spread expanding.  We could see similar action again on a continued sell off – though we have no reason to believe the speed of any such selloff would be the same.

Transactional liquidity was improving during the entire SPY up move shown by the red lines in the first chart below.  Friday marked the largest one day change in liquidity (becoming more illiquid at the fastest rate) since early in the recovery.

The way this ratio works is below.

While we can look at any given metric and say that it indicates risk or not, we cannot only rely on models to define risk – especially during tail events such as this one.  As such, we think of risk as the possibility for significant loss or long term and irreparable harm.  Under this definition, we think risk is still at a maximum and preservation of capital remains paramount.

That is all for now, have a great week.