For those of you who tune into our daily broadcast on the web, you may have heard me tracking the European market closes fairly often. I like to pay close attention to the correlation between the U.S. and European markets, having performed a previous study, albeit informal. The last time I looked at this study, I calculated the correlation between each of the major European indices and the S&Ps (the futures, actually) for the 2009-present and 2000-present. Below outlines the correlation coefficients:
Since Jan-2009 Since Aug-2000
S&P vs. FTSE: 0.9662 0.9164
S&P vs. DAX: 0.9495 0.8369
S&P vs. CAC: 0.7860 0.9196
Nothing extremely novel here. We just see that there is in fact a big correlation between the U.S. market and European bourses. We might even say the correlation between the two has increased since 2000. However, today I decided to see what had happened in 2010. At first the numbers surprised me:
Since Jan-2010
S&P vs. FTSE: 0.8966
S&P vs. DAX: 0.4534
S&P vs. CAC: 0.7860
There’s a significant drop in the correlation between the two regions in 2010. Upon further breakdown by month, I saw that the culprit month was April:
But since April, we have been normalizing again. Another interesting point is that when correlation starts to drop off, it might be foreshadowing a disconnect in how the global markets are trading, and consequently cause a sell off in one of the regions. September’s correlation numbers show that we have dropped in correlation with European since July. Perhaps this increased disconnect is another data point suggesting we are heading for a pull back very soon.
I had also analyzed whether this convergence occurs closer to the U.S. market open or nearer to the close. Taking a snapshot of where each market was trading at 10:15a EST and another at 4:15p, I found that the convergence tends to occur in the morning soon after the market open. One thing that I’ve been noticing, especially recently, is that the S&Ps have been behaving particularly loopy during the day session. There have been a lot of reversal patterns and fake outs. From what I have passively been observing, when all the ups and downs have passed, the S&Ps tend to make its final move towards convergence with the European closes. This correlation can be particularly useful for the bulls who want to see that break above resistance into a full out rally as it keeps expectations somewhat in check. I know my analysis isn’t perfect, but just some passive observations I’ve been making lately. So watch those European markets, especially when the U.S. market starts to print days in which there are notable reversal moves.
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