Correlation With Emerging Markets Plunges
- Posted by JC Parets
- on June 14th, 2013
I hate to keep harping on the same topic – this emerging markets disaster. But I think there’s something else here worth mentioning, and then I promise I’ll leave it alone. John Murphy brought up a great point yesterday in that the six month correlation between US and Emerging Market stocks has been consistently positive for years. Any slight divergence between the two gets adjusted quickly by the market and immediately shoots back up towards one.
As you can see in this chart, correlations are plummeting. The weekly bars represent the S&P500 and the red line shows the Emerging Markets $EEM. The 6-month correlation is plotted at the bottom and takes us all the way back to the 2008 global sell-off.
So here is the question: Is this a new normal? Are US Stocks no longer going to be trading with Emerging Markets? These are two different worlds now and just something we need to get used to? Or is this a temporary divergence that will quickly be corrected by Mr. Market? And if so, will US Stocks come down, EM come up, or a combination of the two?
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J.C. Parets is the Founder & President of Eagle Bay Capital, LLC. He earned the Chartered Market Technician designation (CMT) in 2008 and now actively manages money incorporating Technical Analysis and Behavioral Finance into his practice More
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