24th jan 2011 saxo bank soho presentation

Tom Hougaard – www.tradertom.com

Cross Market Correlations

(Intermarket Analysis)

By Tom Hougaard

Saxo Bank – Soho House 24th January 2011


Some of the correlations going the rounds in the Dow Jones Index are: Manic Monday – Voodoo Wednesday – Freaky

Friday

Other correlations are more tangible. Silver and Gold for example follow each other exceptionally well.

This presentation seeks to highlight some of the most common known correlations between related and unrelated assets and investigate if Cross Market Analysts have an edge over the uninitiated.

Introduction


DAX Index


DAX Index vs. FTSE 100 Index


DAX Index minus FTSE 100 Index (10min chart – 10 days)


DAX Index minus FTSE 100 Index (2H chart – 5 months)


DAX Index minus FTSE 100 Index (weekly – 14 years)


Euro $ vs. Crude Oil – weekly Chart


SP500 Index – weekly chart


Dollar Index – weekly chart


SPX vs. $ Index – Correlation is on/off


Dollar Index long-term


SPX long-term


Commodities vs. Australian Dollar

The AUD USD has a significant correlation to agricultural commodities.

Grains are priced in US Dollars. An expensive $ reduces overseas demand for dollar denominated grain supplies. This tends to apply to all commodities, except if there is weather related price fluctuations.

The Australian dollar is known as a commodity currency.


Corn


AUD – USD


Corn (vs. AUD – USD)


Cocoa


AUD – USD


Cocao (vs. AUD – USD)


An old favourite: Dow / Gold


Dollar Index – 4H chart


SP500 – 4H chart


SP500 vs. US Dollar Index – 4 hour chart


Silver


Gold


Gold / Silver


DAX Hourly


EURJPY 60-min


DAX - weekly


EURJPY - Weekly


Correlations are soothing, yet fickle

What’s happened to one of the best established correlations: Dow vs. 10-year Treasury notes

Bonds UP – Dow Down”

Conclusion – so far


SP500 weekly


10y T-Bond - PRICE


Intra-day – 4 indices


Here is my objective

I want to find the strongest currency on the 4H chart

I want to find the weakest currency on the 4H chart

I apply a simple moving average and make a note of direction

I check 4 majors (£$, €$, $CHF, $Yen), and the 6 crosses (£CHF, £Yen, €CHF, €Yen, €£, CHFYen)

At times I throw in CAD and AUD

I tally the score: for example Dollar wins 4 out of 4, CHF gets nothing, I look to buy Dollar Swiss

Using Correlation Matrix


Example of Score Board

Euro: 2

JPY: 4

USD: 3

CHF: 1

GBP: 0

So the natural conclusion is that I want to look for entry signals in the following currency pairs:

Sell Short Sterling/Buy Japanese Yen

Sell Short CHF/Buy Japanese Yen

Sell Short Sterling/Buy US Dollar


Example: Sterling Yen


“There has to be a reason” why the correlations come and go. For bonds vs. stocks it is most likely QE.

However, as a trader my job is not to explain WHY something has happened or is happening, but to swiftly acknowledge it and react accordingly.

My conclusion is that correlations, be it in the stock market, currency market or fixed income should be used with GREAT care.

Correlations look great after the fact. Don’t forget though that it was LTCM fund that nearly broke down the entire US economy in 1997-1998 by trading correlations!!

Conclusion

24th jan 2011 saxo bank soho presentation

Education

Transcript of 24th jan 2011 saxo bank soho presentation