PhilIt is often enlightening to see what moves the market. At various times in the business cycle the market responds differently. To look at this question a simple correlation study was performed using ETFs as surrogates for various macro variables.

Correlations with SPY for the last 95 days:

Oil USO 12%
Gold GLD -10
Bonds TLT -53
TNotes SHY -72
Euros FXE -15
Yen FXY -65
Fincls XLF 88

All of the above relationships are coincident and therefore not predictive. However it is interesting to note that gold is negatively correlated with stocks. On the other hand oil is positively correlated, which is somewhat unusual. The relationship between bonds and TNotes is negative and very strong. It seems that the recent fair weather in the stock market has been punctuated by recurring flight to quality squalls.

The dollar seems to be a significant factor as well. However it is notable that stocks are much more strongly impacted by the yen than the euro. Finally the financials are strongly and positively correlated with the market as one might expect.

Dr. McDonnell is the author of Optimal Portfolio Modeling, Wiley, 2008





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5 Comments so far

  1. Anatoly Veltman on May 28, 2008 4:56 pm

    Useful observations, Phil. For clarity: I’m assuming
    1. between stocks and Tnotes
    2. yen impacted by stocks
    3. market impacted by financials.
    Any special reason to sample 95 latest trading days (as opposed to say 100, or calendar 2008, or whatever?)

  2. Craig Bowles on May 29, 2008 6:32 am

    Short-term growth rates show bond yields have outpaced stocks, gold, and dollar/yen in the recent upswing. Stocks are currently the weakest of the four. Previously when bond yields and gold show the most strength, the next major move is down for everyone. Sometimes it takes a month but the setup has been unsustainable previously. Also, Financials get a lot of press but Telecom had been just as bad before the recent upswing. Yields often move up at the end of each decade and this one seems right on the timing.

  3. Anatoly Veltman on May 29, 2008 9:42 am

    Craig, how do you explain “yields up toward decades’ end”?

  4. Craig Bowles on May 30, 2008 6:37 am

    Not sure why decades often do the same thing. Jake Bernstein pointed it out. Stocks seem to become troubled around the 7th or 8th year of each decade, also. Probably due to some other cycles. The Kondratieff cycle for commodities doesn’t make much sense but Iben Browning found the same when graphing the volcanic cycle and tidal forces, so there’s probably a similar a key trigger to the decade cycle, as well.

  5. Craig Bowles on June 3, 2008 7:07 am

    The Foundation of Cycle Research lists 38 pages of cycles. Roughly 31% of 1 to 17-year cycles found are 9-yr cyles and 25% are 5 to 6 years. Isn’t it odd that the other 14 years are less than these 3 years?


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