Thursday, October 30, 2008

Asset Class Correlations Remain High

Here we see the bottom patterns for oil (USO; top chart), euro futures (middle chart), and S&P 500 futures (bottom chart). These moved in unison to the downside, and now are pretty much lockstep to the upside. One characteristic of crisis markets is that correlations among asset classes become quite high. One sign that we are emerging from crisis would be a decoupling of markets, as markets more efficiently differentiate winners and losers, within equities and across asset classes.

1 comment:

Paul Lam said...

I have also noticed that everything move in unison these days. I guess the reason is that people in panic don't want to stand out. Much like how fish schools together when being chased by predators. Conversely, do the markets move together too in times of euphoria? Can we generalize this high correlation across the board to denote extremes in emotion (and thus prices) based on historical data? (Sorry, I couldn't find out myself because I don't have the means to do it)

I also want to say thank you for the wonderful public service you're doing online. Like I followed your advice and kept a trading journal on Wordpress. It has helped me tremendously in organizing my thoughts and reviewing my own performance (both monetary and ideological).