Market Correlations Are Reestablishing

Strong correlations held between the the S&P 500 SPDR, $SPY, and the US Dollar Index, $UUP, Treasuries, $TLT, and Gold, $GLD, the second half of 2011 but they came unraveled in December. One by one these relationships are starting to come back into a trend with one exception. Take a look.

Since the SPY started its move higher in mid December, the the Dollar Index and Gold are falling into place. Gold was first with a positive correlation beginning just after Christmas and continuing. In mid January the US Dollar Index resumed its inverse correlation to the SPY. But Treasuries have continued to move back and forth in a range over this entire period, with seemingly no correlation what so ever. What is going on with them? Well a few macro issues may be playing a role.

1. The US Budget deficit is out of control and with a Presidential election still 9 months off there may not be any clarity one way or another as to the future of the deficit for some time.

2. Europe is still a mess which undoubtedly is keeping a bid under Treasuries relative to other Sovereign debt.

3. What is going on with growth in China?

4. Is growth in the US economy sustainable and if yes, what does that mean about inflation expectations.

I am sure that there are a million other macro themes that play a role. But until they all get sorted out Treasuries may just continue to float along un-influenced by any other market. There will be a big trade on Treasuries at some point. Wait for it to figure itself out.

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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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