A few years ago I mentioned how correlations among asset classes were at a level I have never seen before. Bloomberg confirmed this in a piece we posted a year ago [Jun 30, 2009: Bloomberg - Correlation Among Asset Classes Highest Ever] I like to call this 'student body trading' and I believe it is due to the dominance of HFT trading schemes (almost all doing the same trades off the same mountains of data) overlaid with the prominence of ETFs (rather than a focus on individual stocks). Currencies, commodities and the like are all in the same boat. This has been my theory for a few years and it's now becoming mainstream.
In a world where almost every asset class now trades together (ex US Treasuries) it is not surprising to see some very high correlations amongst risk assets. But this chart courtesy of a piece by Doug Kass @ Realmoney.com showing the relationship between (Doctor) copper and the S&P 500 is quite eye opening. With copper breaking down yet again today, it does not bode well if the trend of the past year continues to play out.
- Copper hit a four-month low on Friday after weaker-than-forecast U.S. jobs data fractured confidence already dented this week by worries over Chinese monetary tightening and euro zone debt.
It was something I highlighted in 2007 when Kool Aid was near its highest level - S&P 500 hit its highest levels in October 2007! [Nov 23, 2007: Is Copper Signaling a Slowing Global Economy?]
Hmmm, maybe this guy was onto something. [Feb 2, 2010: Trader Who Called 1996 Crash in Copper Says Prepare for Another - Catastrophe Awaits]
p.s. time to bring out those Dow 10,000 hats. Again.