I have to admit, last year was not fun. Oh, sure, the volatility was up and presented opportunity to trade. I mostly passed. Equity correlation was high as well. Remember those days when the market tanked and took everything with it? You needed a bottle of Maalox or Tums just to make it through the session.
How about those days when the last 60 to 90 minutes was a race to the bottom, when the S&P 500 would lose another 10 to 15 handles without breaking a sweat? You may have positioned yourself for follow-through, but the next morning the index was gapping up 20 handles. If that wasn't enough to make you crazy, that same day would see 15-to-20-handle moves twice or three times, up and then down. No way to trade unless you're just guessing or gambling, and certainly no way to invest.
Market correlation was high and getting higher. If you follow the Implied Correlation Index (ICJ), you'll see that it currently sits around 60%, whereas last fall and winter it hovered at 80% or higher. Simply put, trading the indices via the e-mini contract or other vehicles intraday and not holding became the trading weapon of choice. Being a stock-picker was not rewarded, and in fact it was punished, as volatility was high. This was a correlation bubble, and it ended up bursting at the start of the year.
Phil McDonnell from Options Profits reflected on this last October with his column "The Dangers of Positive Correlation." Back in January, there was a report out by JPMorgan that showed the bursting of the correlation bubble in graphic form.
What does it all mean? Well, we can do our own work and find names that trend -- ride them out and not fall victim to the many fears that infect our minds. Some stocks go up, some go down, others stay the same. We create alpha (excess returns over the market given a level of beta) because of superior skill. Just going with the market is not a skill -- anyone can do that. Finding the winners that will outperform -- that is skillful.