Sometimes, it feels like all stocks in an index are moving in the same direction. Very rarely is there full “chaos.” Sometimes, even when there is some dispersion, it is overshadowed by larger moves in a few index heavy-weights. To get some intuition around this, we calculated the pair-wise correlation of the NIFTY 50 constituents since 2015 across different lookbacks, bucketed the median daily correlations into quintiles and plotted them.
If you do an rle, you’ll get an idea about the number of consecutive days spent in each quintile. It looks like quintile 5, representing a highly correlated state, is sort of sticky.
For example, if you zoom into the 20-day lookback distribution, notice how quintile 5 stands out.
It appears that low-correlation environments are actually not that sticky. So, if you see a quintile 5 form, bet on it lasting a few days.