Are there safe markets to hide in if US markets decline?

One of the questions that came in from my “Ask me anything” blog was from a reader named Paul. He asked if all markets are so correlated that an event happening in one market will always ripple into all others. He was specifically referring the Brexit situation, but it’s a broad question really. Stuff is happening all over the world (tsunami’s, elections, terrorist acts, debt implosions, etc) that seem to have impact across the world.

 

I took the time to do two studies…a correlation and comparative relative strength (CRS) study… on most major markets across the world. I compared these markets to the S&P 500. I examined 24 major market indices (two were frontier and emerging markets collective indices) with long termed (monthly) charts.

Understand that the SPX has been in an uptrend for a decade. As such, you are not going to find periods where the SPX fell and another market climbed – at least you wont find sustained negative correlations . You will only find when a market did NOT rise along with the SPX. Such cases indicate non-correlation. Thus, we can extrapolate that to mean that if the SPX finally does go into a tail spin, the markets that have displayed meaningful negative correlation to the SPX in the past may have some potential to move in another direction (i.e. up, sideways, or less negatively).  We don’t have proof of that yet, but the markets that do offer strong periods of negative correlation may be something to keep on our watch list if the SPX loses the magic.

 

Of the 24 markets studied, 8 of them illustrated some periods of meaningful negative correlation. I’ll highlight the charts below, with their negative periods highlighted by trendline. The pane below the price chart is the correlation line – when it is declining, the correlation is becoming negative. The bottom pane is comparative strength to the SPX. Some are more significant than others. I won’t put a comment below all of the charts as its pretty easy to see my thoughts by noting my trendline.

 

Of all of the charts, the following two illustrate the most non-correlation to the US markets. They are Mexico and possibly the Frontiers markets ETF. Note that the Frontiers markets ETF (which we hold in our VTAGS Platform) is pretty new. It holds securities from “Emerging-emerging markets” such as Kuwait, Vietnam, Morocco.

 

The UK—which was the driver behind Paul’s question – has been very strongly correlated with US markets in the past. You can see that via a very flat correlation line through most of the left side of the chart. That relationship has changed with Brexit (since 2015)—so it may in fact be less of a threat to US market strength as people think. However, that correlation may be that it declines more than the US markets even in the case of a US meltdown–you can see the declining trend of CRS on the bottom pane.

Conclusion

So there you have it. These markets possibly offer some non-correlation to the US and most world markets – keep them in your watch lists for future consideration.

 

NOTE THAT I WILL BE ON VACATION DURING THE WEEK OF JULY 29TH – SO I WILL NOT BE PUBLISHING A BLOG OR DOING RESPONSES TO COMMENTS THAT WEEK.

6 Comments

    • Thanks James–forward / share it with people you think might be interested–always trying to get more viewers, which adds to the pool for comments and shared knowledge. As Red Green used to say…”We’re all in this together”

      Reply
      • For sure. Happy to spread the words.

        After the 25 bps rate cut today, the markets dropped. What’s going on? Thanks.

        Reply
  • Dear Mr. Richards,
    There is CEO and CFO buying in Encana. Valuation metrics look good. The stock seems to be
    bottoming around $6. Value Line has a much higher target range for 2021-23. Michael Sprung,
    another frequent guest on Market Call, featured it as a top pick recently. I bought a position
    last month. Please comment.

    Reply
    • I cant comment here on individual stocks unless I am covering them in the blog-I can do it on BNN so please call in when I’m on the show for individual picks-also I cannot advise you from a professional level. But….I will say that the entire energy sector has been thoroughly thrashed–ECA along with it. There is a case to be made that the sector is oversold and may be a contrarian play for those with the risk tolerance. Usually the time to buy is when the blood is running in the streets, said Barron Rothschild. Perhaps this is that time for the energy sector…? Only time will tell! We have a minor position in an oil stock, but so far have been underweight the sector.

      Reply
  • Dear Mr. Richards,
    Thank you for your quick reply. I will stick with my position in ECA. Another director has also
    bought recently, which adds to a virtually unanimous list of recent buying by insiders. Eric Nutall
    also featured it a while back.

    Reply

Leave a Reply

Your email address will not be published. Required fields are marked *

2 × 1 =

Topics

Topics

Recent Posts

Ask-Me-Anything-Blog-post-crop-e1361249771400

Ask Me Anything: Zoom Seminar

SPX PE

This market might be in a bubble, so profit by it!

S&P sector weighting

TSX looks bullish in spite of itself

gold

Gold oversold: Time to be bold, or should it be sold?

TAN

Green energy stocks extremely overbought

dow theory

Bear-o-meter neutral, with some caveats

cta-bg

Never Miss an Opportunity

Sign up for our newsletter to receive valuable insights that are available only to subscribers.   Beyond the blog – beyond the videos – get the inside scoop.

Scroll to Top