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Stock Markets are Red – Where are the Low Correlations for the Day?

It has been years.

I mean really years since I see volatility like this. Last year was the year where volatility was so extremely low.

It gives people that safe feeling that stocks are like fixed deposits.

The mood is everyone is thinking about WHAT they should be purchasing and not how much is their allocation.

We finally have some volatility in the markets. It is just 2 days where the markets are collectively down about 6-7%.

If you are new to the markets, that is with experience less than 10 years, this may be new to you.

Pretty sure my net worth is going to be hit -$30,000 this week.

Market commentators will look for explanations.

At a time like this I, like to take a look at how some of the prices move these 2 days.

These are some of the market indexes and exchange traded funds that are suppose to have lower if not negative correlations with the market.

The 3 main USA stock market indexes, the concentrated DOW Jones Industrial, the tech based NASDAQ and the broader S&P 500 are down 3-5%.

The uptrend is still intact.

The EEM, or the iShares ETF that follows the MSCI Emerging Market Index, is also down 3%++. This probably reflected the selling before the USA market open on Asian market trading. This seem quite muted as emerging market reactions typically are bigger than the price movement in the USA markets on the downside.

The oil exchange traded note is down.

The Vanguard REIT ETF continues their recent downtrend by being down 3% as well.

Do we see bonds exhibiting the same low correlations as they traditionally do?

After the recent drawdown, the TLT, an ETF proxy for the 20 year treasury bond is up nearly 1%. Looks positive that it held up.

Gold, through the SPDR Gold ETF, for the day have been negatively correlated.

The gold miners ETF is down but not by a lot. Traditionally the gold mining stocks have not been the best hedges since they cross between equities and precious metals.

The volatility index shot up 115%. Think those people writing delta neutral options strategy will cry if they have all their capital writing options which are essentially short implied volatility.

There are ETF out there, such as the VXX that you can leverage upon, but these are not buy and hold ETF, they are like the Daily Leverage Certificates that I introduced. Due to the compounding effect, it is meant more as an intraday trading tool.

One of the hedges, or potential long play in a market draw down have been the US dollar. There seem to be a flight of money exiting emerging markets or overseas markets like Singapore and the influx back to America is good for the US dollar and Treasuries.

The UUP is an ETF that I remember being good in the 2007-2009 period.

On this day, it is doing well.


So the traditional low correlated plays such as the TLT, GLD and UUP are doing pretty OK.

You may be wondering what caused all these and what you should do.

My believe is that your overall system should take into consideration when volatility picks up like this. Your mode of actions should be somewhat thought out with the idea that a 3-5% draw down will happen.

For myself, I set up my portfolio based on my financial security needs. I am near the end of my capital injection cycle.

The allocation is based on overall market value and the individual selections contains a lot of pseudo bonds that usually don’t do too well in times like this.

I do have some speculative positions that are going to be killed HAHA.

However, I do have a rough idea what I should do with them.

Your situation are different. You could be at the phase where you are growing your money.


Drawdowns like this is good for you!

It is good because you experience first hand what you tell yourself that you can stomach the volatility. So now the volatility is here.

How is your stomach feeling?

The markets are always good teachers.

I do not explain the macroeconomic picture that well. I honestly don’t even know if there is an explanation. I am leaning towards that such short term movements are not the result of the macro events. Our talk on profiting on macroeconomic shifts happens this week on Thursday and there are still tickets.

Elvin and Xeo will explain this much better.

Must always put this. My friend La Papillion at Bully the Bear likes to keep these memorabilia from market draw downs. I should to.

What lessons do you learn from deconstructing your child hood relationship with money, or in your experience teaching your kids about money? Do share with us.
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Wednesday 14th of February 2018

So an ETF like iShares Barclays 20+ Yr Treasury bond (TLT) will probably not be a good investment over the next year or two, or even longer, as rates rise. If the US ever experience a debt problem and rates rise even more as they spiral out of control, TLT would defiantly be a big loser.


Tuesday 6th of February 2018

actually uptrend may well be broken - dow futures is down nearly 1000 points


Tuesday 6th of February 2018

Hi Jason, Thanks I think perhaps the Futures data do not reflect so early.

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