If it seems that recently the NASDAQ-100 Index and the venerable Dow Jones Industrial Average (DJIA) are moving in almost mirror images of each other…that is because that is exactly what is happening.
The graphic below, courtesy of ETFReplay.com, shows the 10-day rolling correlation between the DIA ETF and the QQQ ETF over the course of the past twenty years. Note that the current correlation of 0.55 is not only extremely negative, but it is more negative than it has been in 20 years of recorded data, with a dramatic acceleration of that negative correlation during the past week.
[source(s): ETFReplay.com]
Behind this
issue is NVDA, which peaked at 141 last Thursday and sold off more than 16% as
of yesterday, dragging down QQQ in the process.
In a related development, artificial intelligence (AI) stalwart Broadcom
(AVGO) peaked
one week ago today at 1852 before pulling back 16% as of this morning. During this period, the DJIA was rising
steadily, as investors pulled money from the AI superstars and other related
growth areas and reallocated it in blue chip growth areas, like the Dow
stocks. If this trend holds, then market
breadth will continue to improve and we will witness sector rotation, style
rotation and factor rotation as well. The
problem is that the next AI/growth scare could not lead to rotation, but to
widespread selling across the full spectrum of stocks. There are no indications that indiscriminate
selling is just around the corner, but if the next round of selling coincides
with the QQQ-DIA correlation returning to the typical +0.70 to +0.75 range, the
risks of broad and sharp selloff go up dramatically.
Further Reading:
Index
Volatility and Component Correlation
Correlation
Ideation
CBOE
Launches Implied Correlation Index
For those who may be interested, you can always follow me on Twitter at @VIXandMore
Disclosure(s): long NVDA, AVGO and QQQ at time of writing