Pascal
08-25-2013, 06:31 AM
Market correlation is well measured by the CBOE published JCJ (January 2014) and KCJ (January 2015.)
Billy has in the past written a few articles regarding JCJ and KCJ and he told me that he uses the sum of the two to combine mid-term and long-term correlation measures.
More can be found here:
http://www.cboe.com/micro/impliedcorrelation/
In general, stock picking work best in an environment with low correlation. Low correlation environments might characterize long bull markets, where complacency rules the day.
Below is a Figure that shows the Average of JCJ and KCJ.
A few comments:
1. Before the crash of 2008, the correlation level was very low. Since march 2009, this level has stayed high and mostly above 60. This is evidence that QE has lifted all the boats.
2. A jump in correlation is not a sign that markets will correct, but is more a consequence of a market correction. This means that high correlation figures of 70 or more indicate a market that has had a strong pull-back and that might be bought at some point. It is however hardly a timing indicator.
The real question is to understand why the correlation has moved down to the 2007 levels. Does it mean that the market expects QE to end and thus equities to move more in accordance to their own value instead of in accordance to the level of liquidity injected in the system?
I still have to find out a way to use this indicator.
By the way, for the EV RT users, the tickers are KCJ.XO and JCJ.XO
Pascal
19661
Billy has in the past written a few articles regarding JCJ and KCJ and he told me that he uses the sum of the two to combine mid-term and long-term correlation measures.
More can be found here:
http://www.cboe.com/micro/impliedcorrelation/
In general, stock picking work best in an environment with low correlation. Low correlation environments might characterize long bull markets, where complacency rules the day.
Below is a Figure that shows the Average of JCJ and KCJ.
A few comments:
1. Before the crash of 2008, the correlation level was very low. Since march 2009, this level has stayed high and mostly above 60. This is evidence that QE has lifted all the boats.
2. A jump in correlation is not a sign that markets will correct, but is more a consequence of a market correction. This means that high correlation figures of 70 or more indicate a market that has had a strong pull-back and that might be bought at some point. It is however hardly a timing indicator.
The real question is to understand why the correlation has moved down to the 2007 levels. Does it mean that the market expects QE to end and thus equities to move more in accordance to their own value instead of in accordance to the level of liquidity injected in the system?
I still have to find out a way to use this indicator.
By the way, for the EV RT users, the tickers are KCJ.XO and JCJ.XO
Pascal
19661