Monday, October 5, 2009

Stock Correlations In 2009: Oil, Natural Gas, Stocks, U.S. Dollar and Currencies

This article examines the various correlations between several stocks and ETFs throughout 2009, and also how the changed during the year. The study of stock correlations is extremely important for both diversification purposes (making sure your investments are diversified and not correlated), and to estimate which stocks or sectors diverge (have negative correlation). It should be noted that correlation does not indicate a causality relationship.

We looked at correlation of the following stocks for Q1, Q2 and Q3 2009:


This represents the main sectors that we follow: natural gas, oil, gold, north-american stocks, currencies. High correlations are numbers close to 1 (positive or direct correlation) or -1 (negative, or inverse correlation). No correlation means a number closer to 0.

High Correlations

Correlations were computed with our Correrator Tool (Pro)

The most notable observation is that SPY was very highly correlated with everything (average is 0.92! with all of them), except with oil, gas and UUP, where there is a high negative correlation (-0.91). We knew that SPY is negatively correlated with the U.S. Dollar (see our previous post earlier today on why we disagree with one of the INO Q4 Megatrend Projections). However, the positive correlation with everything else is an astounding result.

If you thought you were diversified, think again!

These are the highest correlations for Q3 2009:

- SPY/DIA/SPY/IWM/XLF, and also with EWZ (Brazil stocks), BZF (Brazilian Real), FXA (Australian dollar) (Brazil): extremely high correlation (over 0.90, many even higher)

- SPY and DIA are a perfect 1.0.

- Interestingly, GS is correlated with XLF to a lesser degree (0.85).

Most Negative (Inverse) Correlations

-GS is extremely negatively correlated with the dollar UUP (how ironic) at -0.95

-UUP is negatively correlated with gold (-0.93) and completely with the Euro (-0.99). In fact the dollar is inversely correlated wit everything except oil and gas. This is another significant result.

- The volatility index (VIX) is mildy negatively correlated with all the indices and stocks

Here are the correlations:

Q3 2009:

(please click to enlarge images)

Q2 2009:

Q1 2009:

Variations throughout the year: Correlations are dynamic!

Investors must keep in mind that correlations are dynamic. This is visible in the charts below, which show the biggest variations in correlations from quarter to quarter. Only variations of 0.75 on a quarter to quarter basis are shown.

For example, the U.S. Dollar was only highly inversely correlated with XLF, while in subsequent qurters it was highly negatively correlated with almost everything else. It was also only highly correlated with the VIX in Q2 2009.

There is a notable change in correlation between Q3 and Q2 for XLF and UNG, from +0.28 to -0.50.

The biggest changes in correlations in Q3 have been for gold, positively with EWZ, BZF, FXE, FXA and GS, and to negative with UUP and VIX.

To receive technical analysis and alerts of these stocks and ETFs sent automatically to you, just enter the symbols in the Technical Trend Analysis Tool, (good tools by INO).

Copyright shockedinvestor 2009,

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