CORRELATIONS

As we are all aware, since July 26th 2011 sentiment has driven the market down aggressively, with volatility at historical levels. Investor concern is at extremely high levels. The VIX currently sits at 43.05 having been as low as 15.12 on July 1st. More notably from a technical angle the long term downward trend line on the VIX chart running from the height of the credit crunch has broken to the upside which is a particularly bearish signal.

One-Year - Bloomberg

As traders it is possible to generate a tendency to become somewhat habitual with how we perceive market correlations, which in turn can have an effect on the way we ultimately trade, particularly intraday. It is worth considering correlations specific to market sentiment and beyond, specific market conditions, which in turn should assist us in avoiding costly errors when considering correlations whilst trading. As standard I know that I have a tendency for my mind to be almost programmed to assume the typical Bund moving up, stocks moving down, risk assets (EURUSD for example)moving down etc. In as much as this may ultimately continue to transpire to be the case when we look at longer term charts in 6 months time, at the moment correlations have been capable of falling out of our assumed typical movements. For example, intraday, of late we have seen moves whereby the S&P 500 / stocks in general have moved down, The Bund has moved up, however that has been followed by an upward move in EURUSD. That is not to say that today or tomorrow that correlation trend will continue, it is more to say that we should be aware that correlations can change, and therefore part of our technical analysis Intraday should be to keep this in mind.

With this in mind I have created a number of charts, shown below, to show the current correlations working in the current market conditions.

DAILY CHART

COLOUR OPEN HIGH LOW CLOSE MOVE CRUDE 99.17 100.62 75.71 82.26 DOWN - 17.1% - ($17.33) GOLD 1613.78 1878.77 1602.51 1852.12 UP - 12.9% - $238.34 S&P 500 1333.5 1339.75 1109.5 1123.75 DOWN - 16.8% - (209.75 pts) EURUSD 143.73 145.25 140.56 143.96 UP - 0.14% - 23 pips BUND 127.98 135.26 127.76 135.43 UP - 6.5% - 745 pts You can see above that post July 26th the correlations have been true to form With Stocks & Crude moving down, Gold & the Bund moving north, however the one that had the capability to cost a trader vital P&L here has been the EURUSD. The EURUSD is by in large flat. The reality here is USD weakness of late rather than EURO strength. Personally I am a EURO bear however the US debt ceiling debacle, continued poor economic data (note that the negative sentiment may be overdone on that score with the data showing an overall slowdown in the US economy, but not numbers

suggesting a double dip just yet), an increase in the belief that QE3 is on the way, the Fed stating interest rates (Federal funds target rate) will remain at the current historically low levels until 2013, and of course the fact that the ECB at the time of writing remain on a rate hiking cycle, all go against the USD when looking at this currency pair.

Monthly Chart
DAX, ESTOXX 50, BUND, 10 YEAR T-NOTE, CRUDE, S&P 500, EURUSD Simply for your information, below is a monthly view of the correlations post credit crunch to date on a monthly chart of the above asset classes.

Continuing on the monthly theme, to give a clearer view of particular markets, below is the monthly view of 10 YR T-NOTES, BUND, S&P 500, & EURUSD

Keeping with the same asset classes, the chart below is a daily view, showing us the correlations in 2011 up until July 26th, & then those same correlations post July 26th to date.

In the event that it is of interest I have also added a Daily chart below showing S&P500, Bobl, Schatz, 10 YR T-notes, & EURUSD.

I hope this helps with your trading. Personally paying closer attention to correlations than simply assuming the status-quo certainly goes some way to increasing the probability of positive trading P&L! For anyone unsure of how to do this with ProRealTime I have detailed some instructions below. How to set-up a security comparison in PROREALTIME 1. 2. 3. 4. Open any chart, say EURUSD Spot Right Click on the chart Select compare security (6th option down below change security) Then simply search for your security in the search box as you would when creating a list. Say you wanted S&P 500, simply type S&P 500 and select the one you want from the list that appears. 5. To change from candlestick to line is you want the chart to be clearer, right click on any candle, and then change from candlestick to a line chart. This can all be changed back. 6. To save a chart, click on print at the bottom right of the screen, and then click save, you can then save your chart to your desktop / c: drive etc.