Traders Pray for End of 'Correlation Trade'
Correlation. It's been absurdly high since August. Stock pickers are pulling their hair out because no one cares about why Home Depot will outperform Lowe's or anyone else. It's all about Europe.
Correlation fatigue may be one reason I've heard a steady drumbeat in the past two days hoping that stronger Q3 GDP numbers might shake us free from the correlation trap.
I'm not sure I buy into this, but the argument is that Q3 GDP will be the best print of the year, somewhere in the mid-2 percent range...well above 1.3 percent for Q2 and 0.4 percent for Q1, with many at 2.7 percent to 3 percent.
Why this modest bullishness? The argument goes like this: everyone believed we entered a new downturn by the second quarter....some of it due to the Japanese earthquake...but much of the numbers don't support that thesis. Yes consumer confidence is weak, but we don't see it as much in the spending...retail sales remain relatively strong, claims data have not shown deterioration, etc.
There are plenty who believe the data will weaken again in Q4 — some are arguing tighter financial conditions will take hold.
Possibly. But even if you don't agree with this end of correlation idea, don't underestimate the power of sheer desperation. I have written extensively about the "greed trade," about the poor performance of many traders this year and their need to start making some serious money. That drives higher risk taking. Fear will prevail over everything, but if fear drops even a little (VIX volatility index under 30), animal instincts will come out.
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