Market Correlation - What is It?

Quote from MarketTeaLeaves:

Folks,




Here's my analysis for today. These numbers were taken at 5 AM EST.




US Dollar – Up at 82.490 the US Dollar is up 175 ticks and is trading at 82.490.
Energies – April Oil is down at 91.54.
Financials – The 30 year bond is down 4 ticks and is trading at 141.27.
Indices – The March S&P 500 emini ES contract is up at 1546.75 and is up 16 ticks.
Gold – The April gold contract is trading up at 1579.00 and is up 39 ticks from its close.

Quick Note: Unless otherwise shown the above contract months are now June.

Conclusion
This is not a correlated market. The dollar is up+ and oil is down- which is normal but the 30 year bond is trading lower. The Financials should always correlate with the US dollar such that if the dollar is lower then bonds should follow and vice versa. The indices are up and the US dollar is trading higher which is not correlated. Gold is trading up which is not correlated with the US dollar trading higher. I tend to believe that Gold has an inverse relationship with the US Dollar as when the US Dollar is down, Gold tends to rise in value and vice-versa. Think of it as a seesaw, when one is up the other should be down. I point this out to you to make you aware that when we don't have a correlated market, it means something is wrong. As traders you need to be aware of this and proceed with your eyes wide open.


The monthly jobs numbers were just posted and whereas the futures are higher, the USD went to a high of 82.960 on the June contract and yet the indices are trading higher. It doesn't appear as though this is a correlated market. One of my trading rules is to not trade on Jobs Friday as the markets don't appear to act with any sense of normalcy.

What do you think??
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that's impossible

everybody knows the dollar and the stock market can't both go up at the same time

better check your numbers
 
Quote from braincell:

Create your own custom index of the USD vs major currencies. Price S&P 500 based on this index. See what'cha get.
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don't forget to add gold in there, and also crude
 
Oldtime,

I'm afraid I beg to differ and let me explain. Those were taken at 5 AM EST. At that point both the USD and ES emini were both trading above their closing price. The question during the course of any trading day is who wins that battle because obvious there's a war going on between the two. However this past week the USD (for the most part) has been ignored. The market has gone up despite the fact that the USD has traded higher than it's previous close. My point is these are not correlated and despite that fact the market is still going up. It's almost as if Wall Street is ignoring fundamentals and having a party at our expense.

Sooner or later this will come home to roost. What I've told my followers is be careful that you're not on the wrong side of the market when that happens as saner minds will wake up. Take a look at what happened yesterday. Take a look at the numbers right now. I'm looking at the USD trading 646 ticks above it's closing price from Thursday and the Dow trading 68 points above it's closing price. Usually what should happen is by the end of the trading day this should correct. In other words if the market sees that the USD is trading higher the indices should trade lower. That isn't happening. What I've also told my followers is don't buy into the myth that "this time it's different" I've heard that nonsense for years and guess what? At the end of the day it's always the same. Sooner or later the markets wake up and the talking heads on CNBC will say "see the USD is trading higher that why the markets fell" Of course they always tell you this after the fact.

Best Regards,

MarketTeaLeaves
 
Braincell,

That's a very interesting idea. So you're saying create a custom indicator for the USD and then use that indicator to accurately price the S&P based on that indicator? If so, that's an interesting concept. I also agree with oldtime that Gold and Crude should be taken into consideration.
 
Quote from MarketTeaLeaves:

Oldtime,

I'm afraid I beg to differ and let me explain. Those were taken at 5 AM EST. At that point both the USD and ES emini were both trading above their closing price. The question during the course of any trading day is who wins that battle because obvious there's a war going on between the two. However this past week the USD (for the most part) has been ignored. The market has gone up despite the fact that the USD has traded higher than it's previous close. My point is these are not correlated and despite that fact the market is still going up. It's almost as if Wall Street is ignoring fundamentals and having a party at our expense.

Sooner or later this will come home to roost. What I've told my followers is be careful that you're not on the wrong side of the market when that happens as saner minds will wake up. Take a look at what happened yesterday. Take a look at the numbers right now. I'm looking at the USD trading 646 ticks above it's closing price from Thursday and the Dow trading 68 points above it's closing price. Usually what should happen is by the end of the trading day this should correct. In other words if the market sees that the USD is trading higher the indices should trade lower. That isn't happening. What I've also told my followers is don't buy into the myth that "this time it's different" I've heard that nonsense for years and guess what? At the end of the day it's always the same. Sooner or later the markets wake up and the talking heads on CNBC will say "see the USD is trading higher that why the markets fell" Of course they always tell you this after the fact.

Best Regards,

MarketTeaLeaves
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sorry, it was a sarcastic joke. I don't put people on ignore, but usually when they don't get the joke I just write them off. But since you are so thoughtful and polite, that's all I do is market correlation. I'm almost never directional. And everytime I get directional I get my head handed to me.

since all I trade is forex, nothing can go down unless something else goes up. There are times when I wish I could just short everything, but short against what? Eventually I have to keep score in something, and that something is my base currency, namely usd.

but the move this week caught many by surprise, strong dollar, strong stock market, didn't pay that much attention to crude, it didn't make the news.

USA is in kind of a predicament, the last thing we need is a strong dollar, but a weak dollar erodes the political support for QE

at anyrate, I manage some conservative opm for friends and family, and when I started trading forex on a speculative basis for my own account I realized that no conservative money manager can in good conscience execute properly without some kind of currency component in the over all strategy.

There is a very bright guy from Princeton named Rickards who wrote a book called "Currency Wars" and he runs a chart called "Gold Adjusted S&P". It is very interesting and he is the one who got me to keep at least 10% of my S&P money in GLD.
 
Oldtime,
http://www.elitetrader.com/vb/reply.php?action=newreply&threadid=260747#
You're right, I didn't get the joke; LOL... But I guess if you're a Forex trader, the you are correct. Nothing can go up unless something comes down. The idea of market correlation came to me due to the aspect of pairs correlation, which of course came from the Forex market.

You are correct about the USA being in a predicament. Last month when the ECB announced the minimum bid rate and held a press conference, the USD rose dramatically in a short period of time and the US markets dropped like a rock. Ironically this past Thursday I warned my followers to be careful with the ECB press conference and it turned out to be a non-event. But if you look at where the Euro was trading a month ago as compared to where it's at now, it would seem that the ECB got what they wanted: a lower Euro and the USD is over the 80 mark and has been since last month.

I've heard of that book: Currency Wars. It's amazing that the media is now using that term when they write about USD versus another currency.

Oldtime, I'm new to Elite Trader, is it ok if I add you to the buddy list and would you have a problem if I sent a private message? I think you're pretty much right on when it comes to Gold and Crude.

Thanks and Best Regards...
 
Quote from MarketTeaLeaves:

Oldtime,
http://www.elitetrader.com/vb/reply.php?action=newreply&threadid=260747#
You're right, I didn't get the joke; LOL... But I guess if you're a Forex trader, the you are correct. Nothing can go up unless something comes down. The idea of market correlation came to me due to the aspect of pairs correlation, which of course came from the Forex market.

You are correct about the USA being in a predicament. Last month when the ECB announced the minimum bid rate and held a press conference, the USD rose dramatically in a short period of time and the US markets dropped like a rock. Ironically this past Thursday I warned my followers to be careful with the ECB press conference and it turned out to be a non-event. But if you look at where the Euro was trading a month ago as compared to where it's at now, it would seem that the ECB got what they wanted: a lower Euro and the USD is over the 80 mark and has been since last month.

I've heard of that book: Currency Wars. It's amazing that the media is now using that term when they write about USD versus another currency.

Oldtime, I'm new to Elite Trader, is it ok if I add you to the buddy list and would you have a problem if I sent a private message? I think you're pretty much right on when it comes to Gold and Crude.

Thanks and Best Regards...
More...
the pathetic thing is, yesterday after the close, on cnbc they asked, "Has the United States of America finally won the currency war?"

The little girl was pretty and blonde

but she didn't quite get it that the race was to the bottom, not the top

sort of like a football game when in the last seconds they run backwards across the opposing teams goal post and give them 7 points

then do a touchdown dance

It's a crazy world out there when you are dealing in fiat currencies

sort of like going to Las Vegas and they don't announce the odds until you have already rolled the dice

I don't know what is going to happen with the dollar. I always try to stay as neutral as possible. Now we are up there at 83 on the DX. Historically in recent times, that is where demand destrucion starts taking place. Just like crude, it's good until it hits $100 and then nobody wants it.
 
That is very true. When the USD starts getting into this territory, the markets usually fall and the same holds true for crude. Look what happened last fall when crude started trading over $100 a barrel. Didn't last too long...
 
Ray Dalio has a few very helpful things to say about correllation in
the new Market Wizzard hedge fund book.
I got some very good advice recently from RiskAdict to drop
the correlation bias if you want to trade of the 1 hour or 4 hour chart. " Trade what you see".

But, IMO(actually Dalio) macro drivers constantly change correlations on a short time frame.
I thought recently SP500 would have to follow Euro down after Italy election. WRONG.
So we seem to have new temporary correllations. Gold is
more risk off. Oil hasnt been allowed to go over 100 and is correlating well with USD. USD is
goldilocks relative to Euro and Yen. Bonds dont believe this stock rally , try to rally a
bit (swing high) and sell hard in continued risk on rally. 4 bill/day , 85/month into stocks.
Makes sense to temporarly buy USD and buy stocks.
I do not think I know what will happen next or when.
Now I always try to end what may come accross as "chicken soup"
advice that I am a working stiff stuggling amateur trader.
 
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