Three Rolling Correlations in the Current Market

One way I like to track themes in financial markets is by tracking rolling correlations. These can be correlations among stock sectors/indexes or between equities and other asset classes.

Here are a few correlations of daily returns since June that caught my eye:

S&P 500 Index (SPY) and rising U.S. Dollar (UUP): .58
Rising U.S. Dollar (UUP) and Commodities (DBC): -.53
S&P 500 Index (SPY) and long-term Treasury bond prices (TLT): -.56

When we've seen a rising dollar and weak commodities, that's been associated with rising stock market prices (which we clearly saw Friday). When we've seen money pour into Treasury instruments (a common flight to safety trade), that's been associated with falling stock market prices.

As traders and portfolio managers place their bets on global inflation and recession, we can track their views in the movements of these and other instruments and asset classes. These movements can be tracked in the waxing and waning of rolling correlations. More on this theme to come.

Comments

[MarkMedayski:]

SUPER smart analysis,only why Mr.Market went up with bonds too (30Y bonds had to go down on Friday at leat 2$ because of extreme inversion on such days is normal).Your correlation I agree with completely,but in the bear market correlations brake.
The Friday's rally in stocks was false,we will witness it next week.
I expect bonds volatility to increase starting next week too,check your correlations again,but include there only days with at least 2-3 percent up/down in the time frame you are using.
Otherwise your research would be excellent.THANKS.

2008 Aug 09 06:33 PM

[adan:]

glad to hear there'll be "More on this theme to come...." - thanks!

2008 Aug 10 09:40 AM

[electric car:]

Friday's rally was positioning for options week. Next week is options expiration.

2008 Aug 10 01:42 PM