Have We Reached An Unsustainable Situation?

Sid Norris
 In Blog

Have We Reached An Unsustainable Situation?

Correlations:

In the trading world, we often find relationships between two or more tradeable items. When two items are generally moving up and down together for a period of time, we consider them to be correlated. When they move opposite each other, they are inversely correlated.  Some pairs of items have stronger historic correlations than others.

Examples:

Gold & Bonds are typically correlated. As of this writing, that historic relationship appears to be intact.  Compare that to Gold & the U.S dollar. Those two items typically move opposite (inverse) of each other. However, since mid-July 2019, they have generally been moving up and down together.

Bonds, which are the most popular alternative to stock ownership in the investment world, typically move opposite of the stock market. However, ever since the start of the new year (2020), stocks, bonds, gold and the US Dollar have all been rallying together.  Is this a distortion that has developed because of the mid-October 2019 Fed announcement of QE?  Many think so.  If so however, there was a delayed reaction of 2.5 months.

Check out this chart of SPX, Gold, the U.S Dollar, and Bonds:

Conclusion:

Tight correlations of these four items moving together can rarely be found in history. Therefore, it is extremely doubtful that what we’ve been seeing since early January is sustainable. If history means anything, despite the high level of Central Bank activity in the markets currently, it would seem wise to expect a return to normal correlations at some point, likely sooner than later.


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