Thursday, November 17, 2011

Correlations

Looks like the stock market broke down a bit and is hanging outside the previous trading range. I put together a script to calculate correlation coefficients to see where things stand.
spysdytltzrozuupgldxlexlf
spy1.000.93-0.68-0.64-0.34-0.570.950.94
sdy0.931.00-0.41-0.36-0.15-0.430.830.77
tlt-0.68-0.411.001.000.690.51-0.77-0.87
zroz-0.64-0.361.001.000.720.45-0.75-0.84
uup-0.34-0.150.690.721.00-0.08-0.53-0.51
gld-0.57-0.430.510.45-0.081.00-0.42-0.61
xle0.950.83-0.77-0.75-0.53-0.421.000.95
xlf0.940.77-0.87-0.84-0.51-0.610.951.00

The correlation coefficients are computed for the past 100-days of returns calculated from adjusted closing prices for each asset. There is a little something for everyone here. Equities (SPY) and dividend-paying equities (SDY) have strong correlations. Despite appreciating crude prices, energy stocks (XLE) are still strongly tied with equities as a whole. To get negative correlation with equities, one may look to treasuries (TLT and ZROZ [Pimco Long Dated Zeros]), the dollar, and gold. TLT and ZROZ similar but in terms of correlations with other assets, it happens to be TLT that exhibits the slightly more pronounced negative correlations despite ZROZ being more of a pure play. Surprisingly, the least correlated assets in this study are gold (GLD) and dollar (UUP).

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