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Correlations and Inverse correlation ES
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Correlations and Inverse correlation ES

  #1 (permalink)
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Correlations and Inverse correlation ES

I hear a lot of talk from swing traders about the correlations between the Yen, the VIX, and the ES. In fact, big mike has the yen and the vix (and i believe the 30 yr note) on his charts. A search for "correlation, correlated, inverse correlation...etc" doesn't come up with much. I'm not looking for a magic bullet (I know they don't exist) but I would like to atleast understand what some of the big players are looking at when a pullback is occurring on the ES and they say something like "the Yen is falling." Is this just a confirmation tool?

If anyone has any good reads on it, can you post them here please, thanks!

James

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  #3 (permalink)
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Correlations and Inverse correlation ES-intermarket-analysis-1-.pdf
Correlations and Inverse correlation ES-intermarket-analysis-2-.pdf
Correlations and Inverse correlation ES-intermarket-trading-strategies-1-.pdf

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You're the man. I've got a lot of reading to do.

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Intermarket analysis has been on my reading list. Thanks for the pdf.

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Like most things, inter-market relationships come and go.

There's really not a single example that stands the test of time. Stocks and bonds are generally inversely correlated . . . Except when they're not. Or commodities and oil . . .

More data (looking at another market) will generally just confuse what you're doing.

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Nick

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In general (assuming no bizzaro QE considerations):

USDJPY down is bearish for the ES. (Keep in mind this can be tricky with Japan engaging in their own QE, so you have to figure if the Yen movement is safe haven flow or weakening dilution to the Japanese QE)

AUDJPY up is bullish for ES due to risk on sentiment with a carry trade.

ZB/ZN up is bearish for the ES. Again, assuming no QE logic is in play where both ZB and ES will both go up. The logic is if haven flow goes to bonds seeking safety, it flows out of equities.

VIX up is bearish for the ES, since put options are being purchased for safety and volatility is going up.

Gold up could mean bearish for ES if it's a safe haven flow, but it could also just be dollar weakening, so you really have to understand the nuances across everything: yen, bonds, equities, and the US dollar.

This is what I would recommend: Because it can be confusing to see if the correlations are lagging or leading indicators, focus instead of understanding what is causing each of those respective instruments to move. If for example you see both yen strengthening and bonds strengthening, and there's a lot of geopolitical risk brewing but the equities haven't moved (maybe because it's overnight), then there's a good chance that equities will drop. And even if equities do not drop, you should at least be aware of the possibility based upon where everyone else is starting to park their money.

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Any recommendation how to best calculate correlation ?

Pearson ? Spearman's rank ? Kendall's rank ? Brownian correlation ? Any other ?

I am trying to implement a practical correlation between instruments...
Any thoughts/ideas welcome

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sixsmith07 View Post
...I would like to atleast understand what some of the big players are looking at when a pullback is occurring on the ES and they say something like "the Yen is falling." Is this just a confirmation tool?
...

James

if the trader who trades the ES look at the Yen, what about the trader who trades the Yen? Does he look at the ES?

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trendisyourfriend View Post
if the trader who trades the ES look at the Yen, what about the trader who trades the Yen? Does he look at the ES?

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influence is not necessary reciprocal
i this case, i am sure it is not reciprocal

Yen can be influential on ES
while ES is minor on Yen
i would think Asian and Australian stocks have more influence on Japanese currency than US stocks
makes sense, due to there proximity

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