How the relations among symbols change in a black swan event

It was a week to forget?! It doesn’t matter what type of trader you are or if you trade stocks, options or futures most likely that you lost. Now, all we can do is to regroup and learn what it can be learned from it.

Allot of experienced traders, and I like to include my self in the group, for a while now felt that something is rotten in this up move in stocks beyond any logic. But, and a big but, I didn’t anticipate the velocity and the amplitude of the down move that followed. In other words, I didn’t expect it to move so much in such a short amount of time.

I observed something interesting and I wanna share it with you. I took a grasp at the correlation between Netflix, Standard & Poor 500 ETF, Euro ETF, Yen ETF, Oil ETF, Bonds ETF, Gold ETF, and United Airlines. I’m not gonna get deep in reasoning why I chose these symbols, on short I think it reflects a good image of different sectors and opportunities at the present time.

Following this idea, let’s take a look at the correlation among the above symbols since the beginning of the year till this week:

Now let’s take a look at this week, after the black swan event:

Interesting, huh?! I mean United Airlines started before to shake up and despite the market keep going up the airlines didn’t follow, the correlation among the 2 being negative 21%. Something interesting is in the correlation between Netflix and S&P 500 too. If usually are positively correlated around 81%, as we can see, this week it got close to 0. Are more people staying in houses and what else can do than watching Netflix? I guess. But Disney did crush. So, be aware…

Another thing is that in situations like this, strong down moves, the correlations get stronger. Before Gold, Bods, and Oil were medium positive, medium positive and medium negative. ( in this order) but after this week they got strong positive, strong negative and strong positive. As I said… Euro and Bonds were Strong negative correlated, now they are strongly positive. The reverse is true for Gold and Bonds…

Now I know that the problem is more complex and this is just a way of looking at it, but some trade opportunities could be present if you think these relationships will go back and normalize.

Good luck!

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