Something to consider and that is interesting to think about is what I call the Deflation Trade, or, which is also referred to the convergence of nearly all asset classes on the downside. As correlation moves towards 1.00.
One grouping that I have spotted is SPX, Oil, and EUR/JPY. I have spent the decade watching and studying oil, and never was there much correlation between oil and equities--save for 2004 and 2005 when oil really started to move up, and there emerged a rather tight non-correlation. Well, I guess that counts as a kind of predictable relationship.
Starting in October however when oil started following the SPX almost tick for tick, I thought at first the relationship was causal. So too with EUR/JPY. I also started applying a number of FA concepts to the action.
Now I think it's a trend following trade that's been put on, in part by the black box algorithms, and in part by human trend followers. There is really no "reason" for oil to trade tick for tick with the SPX. But what I see now is that this Deflation trade is reversed very hard when stocks rise. So there is alot of capital squatting on this Trio.
My view is as follows: we need to see the return of non-correlation among various asset classes to determine that we have a better posture. Also, I agree with you if you are suggesting that the bear hand has been played too many times now, and has become weak and undisciplined on the back of all the gains.
Deflation Trade: (uber-correlation)
stockcharts.com
G |
