Markets Correlated Into ‘Risk On-Risk Off’ Dichotomy

Continued Sell-Off Or Another Leg Of Risk-On? My Plan For


Markets currently seem to be highly correlated into a simple “risk on / risk off” dichotomy, with the emini S+P futures leading the way while other markets follow. If the spuz is bid, then WTI catches a bid while the USD and bonds are offered – and vice versa. The tricky thing with trading off inter-market correlations is that the if-then relationship often ends suddenly and the secondary market reverts to trading on its own specific issues.

Inter-market relationships sometimes provide clues as to “why” a market is moving. For instance, when I interviewed Jimmy Rogers (NYSE:) many years ago he asked me, “How can you trade wheat in Chicago if you don’t know what’s happening to iron ore in China?”
 
The has had a strong positive correlation with the S+P this year. I think the rising American stock market the past few months has pulled CAD much higher than Canada specific fundamentals warrant. I’m shorting CAD in part because I think the spuz rally may be overdone but also because if the CAD/spuz correlation weakens and FX traders re-focus on Canada specific issues then those issues will weigh on CAD.

I could make a similar case for shorting .

Gold has chopped back and forth within a $100 trading range for the past three months while gold ETF ownership has soared to all time highs. Gold has rallied ~$400 in the past year and has certainly benefited from the trend to low/negative real interest rates and the “idea” that massive stimulus will ultimately create inflation.

Final thoughts: I’ve thought that the “risk on” rally from the March lows was a bear market rally driven by irrational exuberance over the massive stimulus, short covering, TINA and FOMO. The rally persisted far longer than I thought, and the higher it went, the more aggressively I thought the first break would be bought. Last week, I wrote about the “Island Reversals” and how they might signal a top. So far, the bounce back from this week’s lows has been strongest in the “big name” stocks, while the broader market bounce has been so-so.

One of my favorite chart patterns is the “M” top with a lower second shoulder. The market closing weak today (below the Tuesday – Thursday lows) ahead of the weekend adds to negative market psychology.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.



Source link

Victor Adair


Leave a Reply

Your email address will not be published. Required fields are marked *


About us

InvestLab is a financial services technology company focused on the global trading market. Founded in 2010 in Hong Kong, the company develops trading, market data, and social research products that enable individual investors and small to mid-size brokers to access global markets. We provide brokers and financial institutions cross border capabilities for retail investors into 43 markets globally.


CONTACT US

CALL US ANYTIME