The restest is on.... I still am looking for successful restests and then a bounce to at least 2802.
Lots of warnings, gloom & doom, so there is extreme negativity, that is good for bottomming and basing but one cannot rule out another huge leg down to the 2018 lows
Investors Fear More Pain in Lockstep Markets
Risky investments moving together again concerns some analysts.
A red flag for investors of all stripes? Markets like stocks and commodities are moving in unison.
Lockstep moves are a worrying sign because they signal excessive optimism or fear in markets. They mean investors largely are buying or selling holdings all at once, rather than weighing fundamental information like earnings or supply and demand dynamics. Rising correlations also often presage more dramatic moves in either direction.
The rolling correlation between the S&P 500 and MSCI All Country World ex U.S. index has risen to 0.95 for the first time since February’s market selloff, according to Dow Jones Market Data, which looked at time spans of 20 days. The correlation between the S&P 500 and S&P GSCI commodity index has climbed near 0.8.
Correlation is measured on a scale of minus 1 to 1. A reading of minus 1 means two assets are moving perfectly in opposite directions, while a correlation of 1 means they are completely moving in tandem.
“The setup is for a little bit more pain,” said Francois Bourdon, global chief investment officer of Fiera Capital. “We think there’s a little more downside, especially for the hot segments of the market.”
The higher correlations are a shift from earlier this year when the link between U.S. stocks and other investments had essentially disappeared. Major equity benchmarks like the S&P 500 had surged ahead of global stocks and commodities—assets that are more sensitive to growth outside the U.S.
Now, the sudden return of lockstep moves could indicate that tightening U.S. monetary policy and slower global growth will push riskier investments even lower.
Risky assets and markets deemed safer are moving in opposite directions more frequently. The correlation between the S&P 500 and gold has fallen to minus 0.8 in recent sessions for the first time in a year. The relationships between stocks and other safer assets such as Treasurys and the dollar are also now negative.
That reinforces the view of some market watchers that investors will continue to favor so-called havens and dump riskier options.
Despite the recent volatility, bullish investors and analysts believe positive earnings and economic data will become the focal points of markets again. And a resolution in the trade fight between the U.S. and China could also help stabilize price swings.
But in the meantime, it’s worthwhile for investors to continue watching the relationships across different markets.
Are you betting that risk assets will full further? Let the author know your thoughts at amrith.ramkumar@wsj.com. Emailed comments may be edited before publication in future newsletters, and please make sure to include your name and location.