Thursday, August 25, 2011

Student Body Left, Student Body Right Trading Returns as Correlations Surpass Even That of 2009, and 2010

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The past few years has not been a fun time for 'stock pickers'.  Correlations have risen to record levels, as everything has turned into a 'macro' trade much of the time.  I have called this 'student body left' trading, where the herd all moves in one direction en masse.  And then often times move in the exact opposite direction (of course en masse) a few weeks later.

Government policy, and federal or central bank interventions mean more than individual metrics much of the time.... the 'free market' has been lost long ago.  Combined with the dominance of computerized trading (now accounting from anywhere from 50-70% of all volume) and EFT trading (where the individual components are all treated as one in a buy and sell decision), and we have both structural and cyclical changes happening in the market.

I thought 2009 and 2010 were bad, but it appears according to this chart at Business Insider, we have actually surpassed those levels of late on a 50 day moving average basis.  Not surprising as we've seen the macro (Europe, hopes for interventions) dominate.

[click to enlarge]




[Jun 30, 2009: Bloomberg - Correlation Among Asset Classes Highest Ever]
[July 8, 2010: Hedge Funds "Frozen in Headlights" as BiPolar Market with 1:1 Correlation in All Things Not Named U.S. Treasuries Causes Confusion]
[Jul 15, 2010: WSJ - Correlation Soars on S&P 500 Shares]
 [Jun 29, 2010: Correlations Among Asset Classes Reach Ever Higher Extremes as HAL9000 Algos Dominate Life] 
 [Sep 2, 2010: Why Bother with Individual Stocks in the Perfectly Correlated Market?] 

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