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TraderBG

Market Uncorrelated to ES?

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I'm looking to learn to trade one more futures market that is as uncorrelated to the ES as possible, neither directly nor inversely. I know all markets are interrelated in some fashion but I'm looking for one that doesn't move in tandem like the YM does, nor inversely like the bonds do. The reason I ask is because there are certain types of days I don't like to trade the ES and if the ES is untradable the same usually goes for the markets mentioned above. It needs to be open during regular US hours and have nice volume. Any suggestions?

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There are studies on this subject, but I am not sure where. My guess would be you need to look at :

 

1. Corn

 

2. Wheat

 

3. Pork bellies

 

4. Rough Rice

 

Basically, the Ags. The financials will have more correlation , so would metals and the energy complex. As I am writing this, I am thinking you could google market correlation.

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There are lots of traders in US who trade Dax prior to the US open when the price moves are not related to the US markets, however depending on your location, you will have to be up early to do that:cool: it is an excellent market to trade via EUREX feed which I understand is now available on Zenfire.

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Just because a product trades different hours than the ES, doesn't mean there is less correlation. ES up on thursday, DAX up on friday morning. It seems to make more sense that a non-financial product would be better. Cattle is less likely to be correlated than another index futures product of another country. After all, the U.S. Sneezes and the rest of the world cacthes a cold......

 

One does have to be careful of liquidity issues. Flax seed oil may have little correlation, but how easily can you enter and exit a position in Flax seed oil?

 

edit: Yes, I know correlation does not prove cause and effect....

Edited by CandleWhisperer

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Cash, Treasury Bonds and Investment Grade Bonds Are The Only Assets Uncorrelated to ES over time.

 

ETF's would be:

 

AGG

BND

SHY

IEF

TLT

TIP

LQD

 

AGG is the largest bond ETF in world and its about ~55% treasuries/45% corporates.

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I don't consider Forex to be its own asset class. Guess you could argue it well your way.

 

Forex is a component of other asset class returns in my opinion. Ie, if you own int'l bonds, you figure in the Forex. If you own int'l stocks, you figure in the Forex. Effectively, when you buy forex, you are buying SOMETHING else --- ie, even if just yield on int'l cash

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Cash, Treasury Bonds and Investment Grade Bonds Are The Only Assets Uncorrelated to ES over time.

 

 

That's just not true.

 

As I stated earlier, Oil and Currency Futures do not move in tandom w/ the ES. Does it happen at times? Sure, EVERYTHING mimics the ES moves at some point in time.

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The DAX is correlated with the ES during pre-market.

 

I know this because I've been studying the DAX for the last few months and looking at the ES occassionally.

 

You could very well be right, but don't you think you need a little more than looking at something occassionally before reaching conclusions?

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brownsfan, we are talking about 2 different things I think.

 

I am talking about asset classes -- you are talking about components -- such as 'oil' -- a subsegment of commodities.

 

When I think correlation, I am only considering those asset classes that first offer a real long-term return. I don't think commodities do that. Commodity Trading Advisors might, but the raw commodities have much to prove over the coming decades, in my opinion.

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brownsfan, we are talking about 2 different things I think.

 

I am talking about asset classes -- you are talking about components -- such as 'oil' -- a subsegment of commodities.

 

When I think correlation, I am only considering those asset classes that first offer a real long-term return. I don't think commodities do that. Commodity Trading Advisors might, but the raw commodities have much to prove over the coming decades, in my opinion.

 

Gotcha. I am a simple mind.

 

Pull up a intraday CL chart and compare to an intraday ES chart and they will not look identical = uncorrelated as far as I am concerned.

 

;)

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For the most part, indexes will look the same or very similar.

 

Oil and currencies are the best option IMO to find something that could care less what the ES is doing, ESPECIALLY OIL.

 

I have no more than a gut feel but these do seem to be correlated a lot of the time....it is an inverse correlation but it seems to be there....except when its not of course. :) I guess for a similar reason that bonds tend to be inversely correlated.

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I have no more than a gut feel but these do seem to be correlated a lot of the time....it is an inverse correlation but it seems to be there....except when its not of course. :) I guess for a similar reason that bonds tend to be inversely correlated.

 

I would pull up charts and see for yourself BF. I watch these markets daily and do not see a regular correlation/inverse correlation that shows up w/ any regularity.

 

There was a time a year or more back where Oil and the ES were inversely correlated almost daily. Was a beautiful thing but of course that did not last too long.

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All several others have alluded to, day to day correlations (positive or negative) are bound to volatility. Using the coefficient of correlation figure for the whole population between data streams can be misleading. When indexes are above three std dev’s, just about everything hooks up / correlates(+ or -) with indexes - as fear of getting ‘caught out’ spreads through the collective – ie absolute correlation can go very high. And below 1 std dev, even those with higher relative ‘average’ or composite correlation, tend to drop off in correlation significantly and march to their own drums. Examples are Treasuries, CL, AGs, FX, etc. See The Handbook of Portfolio Mathematics by Ralph Vince circa pg 290

 

zdo

 

 

‘I believe we can continue the Great Society while we continue to print more money twenty four hours a day’ Weimar Bernanke

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The press is claiming the weak $ caused the CL to spike. I haven't seen the relation until the recently. But it's also possible CL is causing the $ to strength. But I think it's the perspective of the US economy that drive the USD which may cause the CL to move as well. Certainly requires further analysis. Interesting to see how they all move violently lately, especial CL's biggest day move ever... impressive stuff.

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The press is claiming the weak $ caused the CL to spike. I haven't seen the relation until the recently. But it's also possible CL is causing the $ to strength.

 

Well, they are paid for writing 'something'..."Buying pressure was higher than selling pressure" most probably won't get any financial press sold and will hardly fill an article...

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But to answer your question I found this article.

 

Here's some extract:

The dataset he used goes from 1970 only until 2004, so it might well miss out some of the more recent volatility in correlation. But even stopping at 2004, Coaker concludes that it's not enough to invest in uncorrelated assets; you have to invest in consistently uncorrelated assets. And if you want a consistently uncorrelated asset to offset your US equity exposure, the best thing he can find for you is natural resources.

 

Natural resources have had a correlation of less than .20 to all 17 other assets in this study, with the highest being just .19, for both small growth and small value. Natural resources have had the lowest average correlations—and the most consistently low correlations—to every asset in this study, including every category of stocks, bonds, and alternatives. Hence, natural resources have provided more diversification benefits than every other asset in this study. Of special note, natural resources have had a negative correlation 83 percent of the time to U.S. bonds, due to their inverse relationship to inflation.

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articles with "economic conspiracy theory" reasons are more appealing, so they write that, as friend of mine said to me when oil hit the 100 level and break out

 

"when prices go up the problem (the excuse obviuosly) are speculators (for our country argentina), businesses that buy and hold consumer products to sell them higher, instead in bussiness as usual, now the inflationary process is on the first world, and whom to blame? speculators, but the economies are so big that buying products and hold them is not enough, so they buy and hold oil, gold and so on" lol

 

So the media feed the idea that speculators are the reason of all "evil"

 

but as my friend stated is ridiculous to think that in both levels, unless speculators are renting australia as warehouse its impossible lol

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But to answer your question I found this article.

 

Here's some extract:

The dataset he used goes from 1970 only until 2004, so it might well miss out some of the more recent volatility in correlation. But even stopping at 2004, Coaker concludes that it's not enough to invest in uncorrelated assets; you have to invest in consistently uncorrelated assets. And if you want a consistently uncorrelated asset to offset your US equity exposure, the best thing he can find for you is natural resources.

 

Natural resources have had a correlation of less than .20 to all 17 other assets in this study, with the highest being just .19, for both small growth and small value. Natural resources have had the lowest average correlations—and the most consistently low correlations—to every asset in this study, including every category of stocks, bonds, and alternatives. Hence, natural resources have provided more diversification benefits than every other asset in this study. Of special note, natural resources have had a negative correlation 83 percent of the time to U.S. bonds, due to their inverse relationship to inflation.

 

Thanks Flojomojo. From these stats and the responses from others as well, I'm thinking natural resources is the way I'm gonna go. Much appreciation to you all.

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