The Correlation Between Equity Markets

Correlation is simply a measurement of how stocks move relative to each other. Simply enough, the SPY and VIX have a NEGATIVE correlation, whereas the SPY and IWM, RUT, and other broad based market indexes have positive correlation.

A quick recap on correlation – a positive correlation means that the securities move up and down together (same direction) whereas a negative correlation means that the securities move apart from one another.

It makes sense that the SPY, IWM, etc. would all move together because they are all US-based indexes. However, when we look at non-US developed countries (Western European countries, Australia) there is a 0.66 correlation, which is positive, but relatively weak.

Emerging countries only have a 0.5 correlation to the US market, which is interesting considering the recent globalization.

The Eurozone has a 0.54 correlation to the US, which is interesting as well considering that the Brexit movement.

Another interesting note is that the Non-US Developed countries have a 0.92 correlation to the Eurozone (which makes sense, because of the similarities of non-US developed to that of the Eurozone.

There is a strong positive correlation to the SPY and a strong negative correlation to the VIX within all these market indexes.

Disclaimer: These views are not investment advice, and should not be interpreted as such. These views are my own, and do not represent my employer. Trading has risk. Big risk. Make sure that you can balance your risk/reward, and trade small, and trade often.

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