Here's a chart to start: http://ift.tt/2on4BkY
There seems to be some disagreement between generally accepted correlations, and it's causing me to question if my models are as precise as they could be. I really need an outside opinion on this. For instance:
In a risk on situation, you would expect: The S&P500, Commodities, and Commodity Currencies to rise together However: The S&P500, and the US dollar are positively correlated, so when the S&P500 is rising, the dollar is usually also rising. And commodities are inversely correlated with the dollar, and equities, so when either of those are rising, commodities are usually falling. This is in conflict with the risk on correlation.
The positive correlation between the dollar and S&P500, and the negative correlation between commodities and the dollar/S&P500 seem to be stronger over the long term. So the dominant correlation seems to be in conflict with the correlations that happen between risk on, and risk off (though in times of extreme risk, risk off has been more dominant.) Which makes sense, because commodity prices act as a constraint on equities to a certain point, and the value of the US dollar acts as a constraint on the value of commodities to a certain point.
I'm at a lost on what to do about this actually, I tried to include both the dominant, and risk on/off correlations in a model but they ended up cancelling each other out. I ended up just eliminating the risk on/off correlation from the model, since charts showed the other one to be more dominant over the long term, but every time I am researching, and a book (Global Macro Trading: Profiting in a New World Economy by Greg Gliner being the most recent) says that commodities usually rally together with the S&P500 it makes me cringe because that just seems to be not true based on charts. Am I making an incorrect assumption somewhere that is causing this conflict?
The chart is the SP500 and Dollar index being positively correlated, and Bloomberg commodity index going the opposite direction. However Global Macro Trading: Profiting in a New World Economy by Greg Gliner says "For example, if someone told you that the S&P 500 was trading 2 percent higher on the day, without looking at any other prices, you could reasonably guess that copper prices, the Australian dollar, and oil prices would all be trading higher " Help would be appreciated.
Edit: Will add 2008 was a period of extreme risk, and the few years after were periods of extreme risk on, but the majority of the time the risk on/off correlations doesn't seem to follow over the long term
Submitted April 24, 2017 at 08:58AM by LifeDecisions999 http://ift.tt/2oDTnok
