One of our newer ways to look at correlations in an ALGO driven market is our Correlation Spike Analysis,where we measure the density of correlation spikes (spikes that fullfill a predefined structure). The basic idea is simple that in a healthy trend you see the leading stocks moving first, pulling more and more stocks into the trend.
Our chart would show this by moving up beyond the kick off line towards the Initial Thrust Line.
A healthy trend wants to reach the Inital Thrust Line. Once reached the Indicator tapers off meaning that the trend breadth is deteriorating, while the market is still moving up. This phase usually takes time, normally more then the kick off and initial thrust phase.
Occasionally the Thrust goes beyond the Initial Thrust Level which leads to exhaustion moves, normally seen at bottoms.
Looking at the Santa Rally we noticed that we never reached the Initial Thrust Line, which indicated that the rally was weak or in other words that the rally was not suppoted by sufficient Breadth.
So either we see another thrust towards the Initial Thrust Line or a correction, which has a higher probability.
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