Tuesday, October 30, 2012

Correlations Are Important

In the last six to nine months or so I have witnessed many stock market "pros" in total state of confusion. Without mentioning any names, they regularly appear on business (alphabet soup) network, I think these talking heads have forgotten one of the most important components of trading - market correlations. Their loyal followers have been confused by them, and are probably losing faith at this time.

Correlations matter for very simple reasons - they depict current state of the market, while predicting where it is possibly going. They show which asset classes are in demand, while letting us know what is being dumped at the same time.

These gurus, whose names I will once again omit, have been in a dog house. They have been wrong umpteen times in a row - mistakenly calling the tops and bottoms in various markets, while missing a simple fact of being ignorant to market correlations.
You can't be short Apple and U.S. Treasuries at the same time - they move opposite to each other. You can't be short AAPL and be long SPY at the same time - they move together. You can't be short U.S. tech stocks, while being long Canadian stocks and Loonie at the same time - they are like one. These facts are not obscure, they are right in front of us - all on the charts, and they have been in place for many years, nothing has changed.

Follow the charts, and forget the talking heads!

click on charts to enlarge

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