A Rising Tide...

By: Erik Swarts | Wed, Jul 6, 2011
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Sinking Ship

A rising tide lifts all boats - is certainly the aphorism of choice looking at the series of correlation studies from the market-data aficionado David Stendahl. David's most recent data nugget presents various asset correlations to the S&P 500 Index from the beginning of the second quarter of 2000. A few things to keep in mind with regards to the data.

For anyone remotely connected to the markets over the past several years, the idea that the markets have been strongly trending (and inversely correlating) together should come as no surprise. With that said, it is always welcomed to see the data presented in chart-form to flesh out a bit of the more discrete nuance.


Currencies

24 Month Rolling Correlation: S&P500 vs. US Dollar

S&P500 vs Euro

S&P 500 vs. CAD

S&P 500 vs. Australian Dollar


Commodities

S&P 500 vs. Crude Oil

S&P 500 vs. Copper

S&P 500 vs. Gold


Foreign Equity

S&P 500 vs. CAC40 Index

S&P 500 vs. Dax Index

S&P 500 vs. Hang Seng Index

Some quick takeaways from the data. Notice how tight the high/low bands have squeezed since September (start of QE2) of last year - specifically in the currency markets. The Canadian dollar and the euro have actually recently traded outside of the band - similar to last September. The same dynamic utilized by traders with regards to bollinger bands in anticipating transitions from low to high volatility environments would apply to these studies. For the dollar - it is the tightest spread since early 2002. The respective foreign equity markets have already broken down away from strengthening correlations with the S&P 500.

Collectively, these assets have strengthened their respective correlations (and inverse correlation) since the end of the first quarter in 2007. Interestingly, and as alluded in my previous notes - that also marks the ignition point for the financial crisis.

 


More to come in this line of thinking. I am still away at the shore with my family - but felt compelled to share.

To see the actual data - visit David's site, the Signal Financial Group (here).

 


 

Erik Swarts

Author: Erik Swarts

Erik Swarts
Market Anthropology

Although I am an active trader, I have always taken a broad perspective when approaching the markets. I respect the Big Picture and attempt to place each piece of information within its appropriate context and timeframe. I have found that without this approach, there is very little understanding of ones expectations in the market and an endless potential for risk.

I am not a stock picker - but trade the broader market itself in varying timeframes. I want to know which way the prevailing wind is blowing, where the doldrums can be expected and where the shoals will likely rise. I will not claim to know which vessel is the fastest or most comfortable for passage - but I can read the charts and know the risks.

I am not a salesperson for the market and its many wares. I observe it, contextualize its moving parts - both visible and discrete - and interpret.

I practice Market Anthropology - Welcome to my notes.

Erik Swarts is not a registered investment advisor. Under no circumstances should any content be used or interpreted as a recommendation for any investment, trade or approach to the markets. Trading and investing can be hazardous to your wealth. Any investment decisions must in all cases be made by the reader or by his or her registered investment advisor. This is strictly for educational and informational purposes only. All opinions expressed by Mr. Swarts are subject to change without notice, and the reader should always obtain current information and perform their own due diligence before making any investment or trading decision.

Copyright © 2011-2014 Erik Swarts

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