The correlation of the $RUT to the $SPX and $DIA has recently taken a nosedive.

Correlation is a way to see how synchronized two markets are moving.

In the chart below, you can see that the correlation indicator on $RUT vs. $DIA has moved to slightly below 0.00; signaling a low correlation. A zero correlation represents randomness. A correlation closer to 1.00 or -1.00 is a sign of markets that are in sync — either in the same direction or perfectly inverse.

With the correlation of the mid-cap heavy $RUT (Russell 2000) to the DOW 30 and S&P 500 hovering around 0.00 … that indicates to me that the extended sideways trend of the market is losing it’s structure and has the potential for much bigger swings in the near future.

In the past, a decline in correlation typically occurs either during a large move or before. Since we haven’t really seen any large moves in the broad market, I believe this is an early indicator of potential movement. As to direction — that will be hindsight.

For a market neutral trader, it’s easy to get complacent when every rally is sold and every dip is bought. For a directional trader, those same conditions can be challenging and may cause you to adjust your strategy.

The bigger moves will return and it may be soon. Prepare for these moves to be in either direction by looking for strongest and weakest sectors and drilling down to best/worst in those.

Comment below with your ideas and questions about best and worst sectors/stocks.

Thank you

Andrew Falde
SMBU

No relevant positions.