ChartsEdge trading commentary regarding market sectors and forecast correlations

This weekend Mike Korell has chosen to share at his public page a commentary about correlation of his forecasting tools with market sectors. Another new and interesting twist on using his forecasting tools for trading purposes (thanks again Mike)! This commentary is as it appears at his Daily Maps webpage, http://www.chartsedge.com/wp/:

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ChartsEdge: Sectors

Posted: November 28th, 2010 | Author: Mike Korell | Filed under: One-Day Market Map | No Comments »

Sectors on Monday
I decided to take a look at other sectors and how well they matched up to the BetaP data. I have always figured that the larger the market, the better would be the fit…. Not so true as I found out!

If a market is manipulated to any degree, that causes the relationship between the cause and effect to be skewed a bit. The S&P gets shoved around quite a bit actually. Small caps to a smaller degree. For example, the S&P has a Rho of .68 for the last month while the small caps have a Rho of .78. The correlation is obviously much higher.

Here is where it gets interesting… The best Correlation Coefficient I found was a .94 for oil and gas sector.

If I stick to Profunds sectors which are leveraged and have inverted versions, the sector choices for Monday are:

UKPIX - Ultra-short Japan
REPIX - Ultra Real Estate

Unfortunately, the BetaP shows OIl and Gas as flat on Monday.

Other high correlations include the US Dollar (which has no leveraged version at Profunds) and Treasury bond rates (once again, no leverage).

While I did not test all the funds, I thought I would mention the worst fit… the international fund. It had a Rho of a meager .62. If you think about it, thats not much worse than the S&P 500.