Vicious Cycle

The Fed didn't ride in with the cavalry today. Looking from their perspective, why would they? The domestic data from the past few weeks did not indicate catastrophe. Popular support for further easing is tenuous at best. The main risk is from the debt situation in Europe. The evanescent hope that fueled the past few weeks' action dissipated just as quickly. The Dollar and Treasuries skyrocketed from the lows of the day. In Europe, there is a vicious cycle going on. The large private holders of sovereigns (i.e., banks and funds) insist on being made whole, thus pressuring the very sovereigns they don't want to default. The European governments insist on more and more austerity, negating what little chance they had to have secular growth lift them out of the mess.

Euphoria

The markets have been alternating quite quickly from euphoria to depression and back to euphoria. Today is one of those euphoric days. S&P e-mini December (ES) is up more than 3.2% as I write this. The 10-year (ZN) took a nose-dive after news from the central banks and ADP numbers (which were very good and came with a hefty upward revision of October numbers), but has recovered to a -0.23% loss. The dollar (DX) has tanked also at 78.450. The next big event is Friday Nonfarm Payrolls (NFP).

Options Expiration Friday

Today is options expiration Friday and Leading Indicators at 10:00am. Futures currently read as follows:

Contract	Price
ES Dec	1223.00
ZN Dec	130'155
DX Dec	77.840

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.

	spy	sdy	tlt	zroz	uup	gld	xle	xlf
spy	1.00	0.93	-0.68	-0.64	-0.34	-0.57	0.95	0.94
sdy	0.93	1.00	-0.41	-0.36	-0.15	-0.43	0.83	0.77
tlt	-0.68	-0.41	1.00	1.00	0.69	0.51	-0.77	-0.87
zroz	-0.64	-0.36	1.00	1.00	0.72	0.45	-0.75	-0.84
uup	-0.34	-0.15	0.69	0.72	1.00	-0.08	-0.53	-0.51
gld	-0.57	-0.43	0.51	0.45	-0.08	1.00	-0.42	-0.61
xle	0.95	0.83	-0.77	-0.75	-0.53	-0.42	1.00	0.95
xlf	0.94	0.77	-0.87	-0.84	-0.51	-0.61	0.95	1.00

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).