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Sunday, May 27, 2012

Market Thought... correlation

The SP500, FXI (China), Euro, WTI (oil), Copper, and BKI (BRIC) were moving in the same direction since early May.

The correlated decline in commodities, China and BRIC makes sense, as they are mostly tied to each other. (Although the BRIC, green line, index saw some divergence recently.)

The past four days saw the SP500 shift from the correlation.

Looking at the trends more closely, the Euro started the decline a few days prior to the rest (except copper). Seems like the Euro sparked the general sell-in-may action.

Regardless of what the action is currently saying, I do not fully understand why the decline in the Euro would cause the rest of the markets to decline. The decline in the Euro was highlighted by many, and the recent PMI data made it clear the Euro decline was pretty much a certainty at this stage of the crisis.

With the Euro decline, we should start to see the European manufacturing PMI begin to rise (which should correlate to the economic activity within the EU zone).

I am not sure what would cause such a strong correlation.

In a recent Market Thought post 're-evaluation', I highlighted the potential drags on the market. Looking at the trends more closely, seems to be the above correlation at work. Pointing to the declining Euro as the catalyst.

However, the correlation with respect to US equities, and possibly BRIC equities, appears to be ending.

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