Divergence City

JC Parets
May 21, 2023

Some things are changing.

Have you noticed?

Let's keep something in mind. During healthy market environments, you historically see correlations falling.

It's when volatility spikes in bear markets that correlations all go to 1.

So are these recent divergences just further evidence that this is a strong market for stocks?

The breadth expansion and sector rotation we keep seeing certainly points to that.

So let's take a look.

The first is Large-cap Growth vs Value. The ratio has been moving tick for tick with bonds as Growth stocks got crushed while interest rates were ripping, and then rallied after rates peaked in October.

But more recently, Growth has continued to dominate in performance, while rates stabilized and began to rise.

Look at Bonds rolling over in the face of Growth outperformance:

Sticking with these long duration assets, look at Bitcoin's inability to keep up with Tech stocks.

Is BTC going to catch up to Tech? Or is Tech going to catch down to BTC?

Or are correlations just changing....

And finally, here's ol' reliable. The Negative correlation between equities and the US Dollar has been well documented around here for quite some time.

Dollar up = Stocks down.

Dollar down = Stocks up.

But now we're seeing stocks rally despite the recent bounce in the Dollar off the lows:

I'd love to hear your thoughts on what's going on.

Please feel free to chime in.

What do you guys think?

Are correlations deteriorating just pointing to a healthy environment, just like many other data points suggest?

Or are these changes in relationships hinting at something else?

Or am I just making a bigger deal out of nothing, and we shouldn't overthink these short-term divergences?

Should we expect these relationships to get back to their norms?

Let me hear it.

Which do you think it is?

 

 

 

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