Asset Decoupling: Trading Relationships Devolve

Interesting WSJ column about decoupling amongst various assets:

"Turbulent financial markets are starting to look a little bit like a hoedown gone awry.

The wild gyrations in markets in recent weeks and months are shaking up some of the longstanding trading relationships between different types of financial assets, from stocks to currencies to commodities.

One of the most persistent pairings lately has been between financial shares and energy prices, a waltz where one stumbled and the other soared. Last week, the pair abruptly traded places; they’re still intertwined, but they both began moving in opposite directions.

Meanwhile, other notable links — between the Japanese yen and stocks, for instance, or between oil prices and the dollar — are not as tight as they were earlier this year."

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Source:

Markets Having A Swinging Time


Trading Relationships In Flux as Old Partners Sometimes Out of Step

JOANNA SLATER and MARK GONGLOFF
WSJ, July 21, 2008; Page C1
http://online.wsj.com/article/SB121658354426768553.html

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What's been said:

Discussions found on the web:
  1. Steve Barry commented on Jul 21

    You may get another 100 Dow points, maybe even today, to 11650 or so. At that point it will meet severe resistance and come back down. If the recent low is re-tested successfully, you may sidestep a rout. If not, market is in serious trouble. The problem is most money managers have been left totally brain dead by 20 years of moral hazard and cannot help catching a falling knife.

  2. Rich Shinnick commented on Jul 21

    WAIT!

    Are you saying that banks are “managing earnings.” OH MY GOD!

    That is so retro!

    The * is the universal sign for “We just hit an iceberg but don’t worry, the band is still playing and you still have time to finish your dinner….”

  3. Donny commented on Jul 21

    The most alarming “Decoupling” theory comes from those absolutists, free market, libertarian, wild-wild west believers, who have suddenly abandon their core beliefs, demanding the Fed to intervene, and more bailouts for bad decision makers on Wall Street.

    Now because of the sudden reactionary policies of a Fed consumed & hellbent with pleasing Wall Street, they have de-balled themselves.

  4. HCF commented on Jul 21

    This is what always gets me about correlation between asset classes: Certain things are correlated until they aren’t! There’s no established physical relationship between asset classes (unlike, say, F=ma or V=IR, etc.). It’s always surprises me that people are so shocked that two assets trading in opposite direction (say financials and oil) suddenly starting trading in the same direction.

    HCF

  5. vfsv commented on Jul 21

    In Silicon Valley, the prime assets are house & NASDAQ prices. The asset correlation between these two has been extremely high.

    With Google off $50 last week, & perhaps finally “broken” on the charts, housing should not be far behind. The first tentative signs of this may already be in the RE data, as seen at:

    The Last 30 Days (Jun’08 Data)
    http://www.viewfromsiliconvalley.com/id431.html

    Thanks!

  6. Carl Weiss commented on Jul 21

    Hi Barry,

    Sometimes they’re de-coupled and sometimes they’re not.

    Here’s a Crude vs.S&P 500 chart that shows tremendous synchronization between the momentum of the Buy Programs in Crude and the Sell Programs in the S&P.

    (Note – The indicator plotting the Program Trading in Crude is inverted so that it is easier for the eye to compare it to the Program Trading in the S&P).

    http://www.transactionlevelanalysis.com/2008/07/is-there-a-correlation-between.html

    Seem to us that the coupling runs hot and cold, and will probably continue to.

    From a high-level, it would take a lot of human re-engineering to stop this particular coupling.

    Dig your blog.

    All the best,
    Carl

  7. Alfred commented on Jul 21

    This is a fairly stupid comparison with regard to the dollar crude relationship. Just because one asset class moves faster than the other proves nothing other than the existence of different amounts of speculation. Bernanke in his latest testimony called the relationship between crude and the dollar complex and difficult to understand. Obviously he does not understand or he does not want to understand for whatever reason, but there is nothing ambiguous in the relations between crude and the dollar. In fact they are part of a riskless profit trade or arbitrage trade, and this has not changed a bit.

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