Correlations in statistics work until they don’t. Constant measurement and graphing regressions over and over again and measuring confidence intervals will help you keep confident that the correlation you are assuming is indeed happening.
If you are the first to spot a correlation, you can make a lot of money. It’s happened a couple of times in my life. Once I saw something happen and put two and two together. I started buying everything I could. One trader grabbed me by the scruff of my neck and simply said, “Sold.” to me. I turned and said, “1000.” Turned around and as I carded the trade the market flew higher. Was fun watching the blood drain from his face.
Over the past several years, there has been one truism in markets that everyone has leaned on. How many times have you heard some analyst say, “We are all connected.”. “Our market is down because the fill in the blank market is down and this whole globalization of capital is dragging us with it.” I bet a lot.
I have heard it so much that I am beginning to believe it’s not a true statistical correlation that has meaning anymore.
Check this out.
The Hang Seng
All the markets are down, but some more significantly than others. I think the great decoupling has already started. It’s leading to sloppy analysis. My bet, a bunch of the HFT algo boys all have this programmed in and if markets really decouple they get an ass whippin.