It may seem like all that is driving price actions these days is headline after headline about the Trade War and the president. That is not wrong, yet we are barely off all time highs. So what is happening? Sector correlation is rampant levitating the market as money flows from one sector to the next over and over.

Average sector correlations for the S&P500 closed at .2. This is the 4th percentile of the past 15 years, a rare occurrence. We show the past month of trading below. All blue, interesting coming off very extreme correlations in the prior August sell-off.

So what does this mean? First this is *generally* bullish. Our prediction of 21 day realized volatility is 10.3%. The VIX is pricing implied volatility at 16.11% as of today’s close. That is a volatility risk premium of 5.81 points.

Therefore given the current data we are faced with we believe that VIX is overpriced, by a lot.

When does this change? If VIX stays elevated and sector correlations continue to drop we get a warning sign that this forecast is at higher risk of being wrong. See our chart below, the regime switch signal.

This signal is *close* to triggering, which means implied volatility needs to come off quickly for our forecast to hold valid.

We hope you enjoy our report. Please email with any questions,