Chart of the Day

Today’s chart comes from Avid Chartist, and shows why understanding the US equity markets for an Australian investor is paramount.

The chart shows the ASX 200 and S&P 500 both priced in US dollars (USD), for all of 2011 up to September 12. They have tracked each other especially closely since early May, just after the S&P 500 peaked.


    • Very true – I’m now moving more and more of my focus to overseas markets, but I’ve been trading Aussie stocks for so long now…(feels like an eternity)

    • True enough, for traders.

      But for everyone else and traders also, I think it doesn’t hurt to be reminded that our stock market is joined at the hip to Uncle Sam, and the economic futures of the two countries are likely more than a little bit correlated.

      US sneezes, Australia catches a cold, used to be the saying, and it’s still true, despite all the political and media focus on China.

      • And if you’re a stock-picker, you’re probably wasting your time, due to the high level of correlation. See below. Anyone have figures for correlation of sectors in the ASX?

        Actually, maybe you could just give up on trading equities and trade AUD/USD instead. Again, see below.

        As for me, the only thing that makes sense right now are the “rugged individualists”, as described below.

        “U.S. stocks seem to be walking the picket lines in front of the capital markets, chanting in unison. Well, not literally, of course. But just look at the correlations between the 10 industry sectors of the S&P 500. At 97.2% average correlation, U.S. stocks are moving in lock step to a degree we haven’t seen since the depth of the Financial Crisis. This is not the normal course of business, to say the least. More commonly, some stocks go up while others decline.

        Many other asset classes are apparently siding with stocks, and moving alongside them – sort of a sympathy strike. These include High Yield Bonds (which have many equity-like financial characteristics but are, ultimately, not stocks), the Australia Dollar, and developed as well as emerging economy stock markets.

        The only assets that still have some independence left in them – call them the rugged individualists – are gold and silver. These precious metals still show negative correlations to stocks (negative 55% for gold and negative 35% for silver).”


    • what do you mean?

      Id suggest all major world equity indices are highly correlated/cointegrated since the markets have gone electronic.

      Why do you sugggest the relationships ‘breaks down’?

    • Ignore my previous comment. They tracked each other reasonably closely in 2009 and 2010 as well, when commodities rallied. I was just hypothesising that that would boost the All Ords more than the S&P 500. Not the case it seems.

  1. Guys, here is 12 month chart of markets, and you can see they all look similar, and if you look over a > 12 month period it’s even worse.

    Unless you’ve got a DMA terminal and trade the moves, are you going to put lots of your long term capital in the market right now? At a meeting in HK last week it was said that hedge funds had 50% of their allocation in cash/bonds. That shows the risk off climate IMO.

      • Yep, it’s risk on (USD falling) or risk off (USD rising). Precious metals marching to a somewhat different beat, though.

        • It’s interesting that gold hasn’t taken off more, but it’s more evidence that there isn’t a bubble yet IMO.

          • Oh I think it’s very definitely being held under control. You are aware of GATA’s work, the 2% rule, etc?

        • I believe there is manipulation, but I’m a skeptic on GATA and they have a vested agenda IMO. I’ve seen too many false claims from them. I’m not saying some of what they say isn’t true, but they are unreliable IMO, and I don’t read them at all now after my initial research. Because there is a huge lack of transparency it come naturally you get misunderstanding/misinformation. I don’t know the answers, but I go by the data I see on the WGC, CME, but you can’t see OTC (the so called dark pool) and much of what’s written is guess work.

          • To judge a person’s or organisation’s motives I usually ask “what’s in it for them?” i.e. how do they profit from someone believing their assertions?

            In relation to GATA and Adrian Douglas in particular, what profit motive do you think they/he have? What’s their vested agenda? Do they make money from exposing the actions of the gold cartel? I don’t think they do, as I don’t see that they are selling anything. But would be interested to hear to the contrary.

            (from GATA website:
            “GATA is a civil rights and educational organization incorporated in Delaware, U.S.A., and contributions to it are federally tax-deductible in the United States.”)

          • To be honest I don’t know what their interests are. I might be being harsh, but I was lead down the garden path by them when I first started my research and I got sick of not know what to believe. I now have a few good industry contacts and I seek guidance from them. I’m not saying don’t use GATA, but I choose not to after my experience. There are many more worse places to find out information on gold, and I was fooled by a lot of them at the start.

            Again lack of transparency and we all struggle to understand. Likewise I’m open to any information that helps my understanding.

  2. I guess the point is that we are just a small part of a global market. A global price taker, not a price maker.

  3. Increasingly equity markets are driven by macro factors than anything else.

    It is evidenced by both high correlation across markets as well as high correlation inside a market.

    “S&P 500 three-month correlation is 0.73, the highest in at least the past 20 years, and up from just 0.44 at the start of August” –

    Value investors or stock pickers are having a hard time.

  4. Yes quite interesting. So any thoughts on the breakdown of the correlation recently? US markets holding out on the hope of QE3?

  5. Just a comment from a non-trader who actually gives a toss about his superannuation…. What about all the poor folks being told that spreading their super across both Aust and Global Equities is spreading the risk? Absolute friggin baloney…. not only on the timescale shown above, but for the annual returns over the last 30 years the r2 is about 0.7.

    Time for MB to start having a crack once more at the super “industry”, Joe Average is copping a flogging.

    • Good comment Jackson.

      My superannuation articles are in the pipeline and I’ll be expanding on this problem – the fallacy of diversification (regardless of asset classes) amongst a robust asset allocation model based on the reality of risk (where you are erroneously labelled a “bear”)

    • Yep top comment.
      There is no such thing as diversification.
      You can either choose to invest in US dollars, or something that isn’t a US dollar…. doesn’t really matter if it’s stocks or property or even gold, in my opinion, they are all correlated, to varying degrees.
      Being out of US dollars and in almost anything else has been the best investment or trading option since early 2009.
      It’s looking like now is the time to get back in to US dollars, and out of almost everything else. Except maybe Gold, which may (may) have one final spurt left in it, after some near term weakness finishes.

      • Thanks Prince.
        The financial world floats atop a sea of US dollars. Asset prices for all asset classes rise and fall together as US dollar liquidity rises and falls.
        Hasn’t always been so simple, but has been for the past decade or so.