Tackle Today: When correlations break 💔 | Tackle Trading
≈ Diversification: the last free lunch. ≈
Dualism is present in all sectors of our lives, including our own personality and behavior. The Yin and Yang from Ancient Chinese philosophy describe exactly that: how opposite forces may work together, interconnected to shape everything we know in the Universe. Too much order and you create rigid structures that evolve too little over time. Too much chaos and you degenerate into nihilism. Evolution requires balance. Balance requires energy.
Duality is also omnipresent in the financial markets. There we find aggressive vs. defensive sectors, positive and negative correlations between stocks and the SPY and also between broad market sectors and other vehicles like US Dollar and Gold, for example.
In the Chart of the Day, you will find a correlation matrix between broad market sectors ETFs, the SPY, UUP, and IAU. In the heatmap, the reddish, the lower the correlation; the greenish, the higher.
Notice how IAU correlates negatively with almost all other ETFs. Usually a safe haven, it’s natural to consider it a lifeline when all other ETFs fail.
That is when we had problems last year:
SPY in 2019: +30.84%
IAU in 2019 +17.88%
You buy Gold to protect your portfolio against economic stupidities and receive an unexpected plus: it becomes #BFF with the broad market. You go aggressive SPY/defensive Gold and both go aggressive.
Diversification is the last free lunch available, I suppose.
Don’t try to predict the future using historical correlations, especially if there is a presidential election in the way.
To hell with ergodicity. Buy Gold.
And I saw from the cathedral
You were leaving me
So take my time
And take my lies
’Cause all the others
They want to take my life
Chart of the Day: Correlation Matrix
By definition, correlation describes the relationship that exists between two assets and their respective price movements. The matrix above depicts the correlation between broad market sectors ETFs, the SPY, UUP, and IAU. The reddish, the lower the correlation; the greenish, the higher.
Note: Because the ETF XLRE was created in October 2015, that is the window here considered, October 2015 › December 2019. The ETF XLC was not considered.
Video of the day: Trading Concept Check: O.H.L.C.R Data (Open, High, Low, Close & Range)
Watch this quick video to help you make sure you understand the data that goes into the charts that traders use to help them make profitable decisions.
Trading Justice Podcast Episode 357: Option Trades on Earnings
In this episode, we welcome Tyler Craig to discuss option strategies with a deep dive into Straddles. Whenever earnings season comes around, many options traders break out their options playbook and pull out this unique and powerful options strategy. Listen to the episode in the player below:
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Originally published at https://tackletrading.com on January 22, 2020.
