Correlation: SOX, unemployment claims (U), and Junk Yield Spread (JYS = difference in interest rates between junk and AAA-rated corporate bonds):
There is a positive correlation between JYS and U. There is an inverse relationship, between them and SOX. Any discrepancies between these relationships, can be expected to revert to the normal trends. For instance, in 1999 rising SOX and falling U, should have been accompanied by a falling JYS. The fact that JYS was steadily rising, from mid-1998 on, should have been a warning sign. That discrepancy was resolved by 2001, with the 3 variables assuming their normal relationship.
In recent years, the relationship of these three variables has been extremely close. The long trough in U and JYS, 2004-2007, corresponds to the long high plateau in SOX. The end-2008 trough in SOX coincides exactly with the peak in U and JYS. The blip up in JYS in mid-2010, corresponds to the blip down in SOX. The peak in SOX in early 2011, coincides exactly with the trough in U and JYS.
My reasons for posting this:
1. The fall in the SOX in 2011, is not some random event. It is closely tied to macro trends which should be watched.
2. Very recently, the Junk Yield Spread has spiked upward. If it keeps going up, then SOX will keep going down.
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lower chart from seekingalpha.com |
