Thread by @oddballstocks

The old phrase: "In a panic correlation approaches one"

We're now approaching a perfect correlation without even needing a panic.

Might be fascinating to muse on the "but what happens in a crash" scenario.

The cynical take is everything crashes terribly and the bottom falls out like never seen before.

But there is also another take: That if passive money doesn't sell then it's possible for a small portion of funds to move the market up due to limited float

I think that's what we're seeing. Funds are gobbling everything up and the market float is shrinking.

If you have a few percent decline and passive doesn't sell a buy the dip from quant and the funds left can push things back quickly.

As the float continues to shrink the bid becomes dictated by a smaller and smaller pool of investors.

In theory this small pool are the highly intelligent active investors doing research, but that's the theory. I doubt that's actually true.

Eventually this can be a self reinforcing mechanism. If the float shrinks enough the marginal passive buyer continues to push the bid up as the active investor sells.

At some tipping point the only way a passive dominated market could crash is if..

retail investors lose confidence and pull money. At that point we'd get a crash of biblical proportions because there is no natural buyer.

I don't think we're at that tipping point yet, but the dynamics of this are fascinating to think about.