Dollar Down, Gold and Oil Up? Today That’s Good! Here’s Why
These past few weeks are a great opportunity to learn about how market correlations really work.
In the traditional teaching (found in most investment management books), it is taught that when interest rates rise, stock prices fall. When interest rates drop, stock prices rise. That scenario and many others have proven to be untrue this entire decade. And you will certainly never see in those books that in order for the stock market to rise, gold and oil prices need to rise while at the same time the dollar needs to drop. But this is exactly as it’s been playing itself out over the past month or so and it will continue to play out until it decides to stop.
What this means is that correlations are a dynamic (not static) process. And oftentimes correlations will not be logical. Where you gain an advantage over the majority of people who get stuck on this is that they try to fight these ways or they get stuck in models that that rely upon a certain cause and effect to make decision. By allowing yourself to understand that correlations are dynamic and often change within weeks, you learn how to avoid traditional pitfalls and you become aware of specific conditions you can take advantage of. And right now that means that the stock market is rising on the days that the dollar drops and gold and oil rises. I agree it’s not very logical but at least for now it’s reality. Also, know that this correlation will soon change, just like all others always have.
Use market correlations to your advantage. Do this by first understanding that they are a constantly changing dynamic situation. And when you look at correlations, look back only a month. Our studies have found that a one-month look-back is optimal, especially for trading.
Special Note- We’ll be conducting our 8th Swing Trading College beginning January 4, 2010. The Swing Trading College remains our most popular program and provides you with 14 weeks of learning how to build your trading business using quantified strategies. Included in the course is 4 weeks of live trading that follows 10 weeks on intensive on-line training. If you’d like to attend a free presentation I’m conducting for the upcoming class, please click here for details.
Larry Connors is CEO and Founder of TradingMarkets.com and Connors Research.