Dude, Where's My Correlation?

  • Posted by
  • on January 26th, 2011

As discussed here, the Great Macro trade of 2008-2010 has shown signs of wear and tear.  The US Dollar does not get an automatic rally when markets sell off, and metals/mining stocks don’t always fly when it sells off.  Emerging markets have completely lost their mojo, at the expense of old industrial names.

It’s not rocket science, it’s money flow.  In an environment like 2008-09 when every central bank is accomodative, the correlation trade is a no-brainer.  When policy splits and some countries begin hiking rates, it’s not so obvious…risk is not always ON or OFF.

Can we take this idea and run with it?  For as long as it lasts, why not?  You see, I’ll take any side of any argument at any time.  That’s not a moneymaking trait, though often an annoying one.  It does, however, allow me to accept the market’s message, rather than imposing my opinion on it.  So instead of developing a macro thesis, and figuring out a way to implement it, I do the opposite.  I figure out a way to get in gear with the market’s message, and the reason usually comes later.

Who among us, being totally honest with ourselves, can’t come up with a list of pros and cons on the macro environment?  Doesn’t every trade represent a buyer, and an equally motivated seller with a different reason for acting?  Until we accept that we have no informational edge,  we’re distracted from using our psychological edge.

What type of edge can we use now?  How about putting as much weight on the strength of $GE and $IBM as we do the weakness in China and India?  At no time have I thought to ignore those data points, it’s just that we need to look at the reverse and realize that U.S. large caps have underperformed for a decade.  They may not be hated, but they are definitely not loved.  Someone on StockTwits said it great the other day, “the most widely held stocks that no one owns”.

It could very well be that the combination of apathy and a still-accomodative Fed outweighs the combination of exploding demographics and tightening Chinese/Indian/Brazilian central banks.  It could be that the shareholder base of $FFIV is less focused on the company and more focused on the stock, and that the shareholder base of $DOW is just the opposite.

The financial media is here to come up with reasons all day long, there’s no need for market speculators to do the same.  We should figure out ways to be long stocks with unmet demand, and short those with unmet supply.  For those with an informational edge, there is an opportunity to position ahead of the news flow.  For the rest of us, there is the obligation to respect the market’s message and let the “reason” present itself later.  Price…I may not always embrace it, but I respect it enough to never argue with it.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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