Don't Believe Your Lying Eyes

Chinese equities continued their precipitous decline, interrupted by the new circuit breakers, which reportedly will be suspended.  Global equity markets are also in a dramatic decline.   However, do not be misled.  Knowing the direction of China's blue chips (CSI 300) does not really help predict the direction of the US equity market, even though it may have felt like that in recent days.   

The correlation between China's CSI 300 and the S&P 500 may not be what you think.  Over the past sixty days, the correlation on the percentage change of each is less than 0.1.  Over the past 30-day, it is less than 0.05.    Inconsequential.  

What about the correlation of levels (day-to-day direction).  The correlation is 0.24 over the past 60-days.  It is 0.16 over the past 30-days.  

This is not to deny that the sharp fall in Chinese shares have spurred selling of US stocks in recent days.  The simple correlations warn that recent days may have exaggerated the relationship.  It is warning not to rely too much on what appears to be a "lock". 

 Don't believe your lying eyes.  


Don't Believe Your Lying Eyes Don't Believe Your Lying Eyes Reviewed by Marc Chandler on January 07, 2016 Rating: 5
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