From the desk of Louis Sykes @haumicharts
This is an issue that pretty much everyone encounters at some time or another…
I’m going to share a few recent examples, and then discuss how overthinking these relationships could potentially end in a world of hurt.
First up is King Dollar… or should I say, Peasant Dollar?
Considering the unusually strong negative correlation the Dollar has had with risk assets since March, any material rise will likely act as a headwind for risk-appetite and could throw a serious wrench in the bull case.
And if you take a step back this all makes plenty of sense. We could go down the rabbit hole and argue that with the rally as dependent on liquidity conditions as it may seem, a stronger Dollar should definitely dial down the music a bit.
Then I saw this tweet from Aksel Kibar. He made a great point and it really resonated with me:
A rising dollar is not necessarily a reason for Global equity sell-off or Gold weakness or Bitcoin sell-off etc.
A rising dollar is a rising dollar.
A breakout on Gold is a breakout on Gold. Not on Silver, Platinum and Palladium.
Treat each chart on its own merit.
The same applies to ratio charts and the analysis of relative trends like Small vs Large-Caps, US vs International, and Value vs Growth.
Just because there is a historical relationship whereby Value tends to outperform Growth in an environment where SMIDs are leading Large-Caps, doesn’t mean that it always has to occur that way.
Correlations will strengthen and weaken, even flip from their traditional direction at times. In some cases, we’ve seen very long-term correlations go away altogether.
We must remember the market is dynamic – it is constantly changing and causing intermarket relationships to adapt and change accordingly with it.
Anything can happen and nothing should be ruled out… this lesson should really be top-of-mind after the bizarre year we just had.
The market is a complicated machine, full of many different moving parts, and is designed to fool the majority.
To say a correlation that held up a decade ago has to hold true today, in a completely different environment… is just foolish.
I was discussing this internally with Strazza. He argued another great point that while we may want to overweight International stocks due to their outperformance, that doesn’t mean we want to avoid their US counterparts. Why not own both!?
A relative trend can favor one asset over another without creating a mutually exclusive environment where both can’t be doing well at the same time.
At the end of the day, while these relative trends tend to occur together, they don’t have to.
For this reason and many others, we always want to evaluate them individually and on their own merit.
Thanks for reading this week’s note, and be sure to get in touch to share your thoughts!