QuantumLogicTrading
Short

CYCLICAL SPX vs JPY correlation - what it means (SHORT SPX)

FX:SPX500   S&P 500 index of US listed shares
as you can see below 8/12 months of the time the JPY is heavily negatively correlated with the spx             , normally between 80-90%, there also is a pattern, that the JPY/SPX stayd negatively correlated for 8 months before turning positively correlated for about 4 months, this cycle continues unbroken below..

as we can see by the red correlation being above 0, The markets are in the 4 month "positive" correlation phase, this to me is a bearish signal for SPX             bulls as
1. we are at the end of the average 4 months of positive corrs, before the market turns back to negative, thus this may be a signal that the market is going to turn bearish (in order for the correlation to go back to negative).
2. the positive correlation has tailed off in recent days, signalling it is an end to the positive trend and that the negative trend may start soon

the reason i have chosen weaker markets to correct the pair back to its negative correlation, rather than weaker JPY is because:
1. the spx             is near highs so a downside turn around is more probable.
2. volume and volatility are at yearly lows - low volume means low interest in pushing the price up and the market is effectively in limbo, low volatility means volatility is likely to pick up and in turn push investors away.
3. marco econ risks/ uncertainties such as the feds tightening cycle and brexit will surely continue to be priced into long JPY and short risk assets (spx)             - suggesting that JPY weakness will not be the one to give in, it will be the stocks .
4. the USDJPY             isnt at all time low levels, there is more room for JPY buying before any liquidity tightens - especially if the BOJ continue to ease.

BOJ/JPY background;
the BOJ seemingly has no control over their economic target inflation, CPI             is consistently negative even after years of easing and high employment vs the $ fed who are doing the opposite and hiking rates with relative success, IMO because of these factors the USDJPY             should be at 130.
However its not. it is at 109, and JPY serving as a risk off asset is the ONLY explanation for its strength. there is no other macro economic reason for JPY's strength, apart from safety seeking.
(JPY continues to be a net creditor economy - this is where the perceived safety comes from)

If anyone else has a different reason for why the JPY is so strong, id love to hear it
JohnKer PRO
6 months ago
Appreciate your work. Feedback: noting the federal reserve has not hiked interest rates, albeit one tiny increase a long time ago now of just 0.25 points. I don't believe there is a correlation between the yen and the SPX. One could put up any chart and find some type of relationship.
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QuantumLogicTrading JohnKer
6 months ago
you are right they have only hiked once.. the point is that the BOJ and FED have diverging policies.. the BOJ is still easing and may need to do more, whereas the FED is actively hiking.. a 25bps hike was a 100% increase in the rate from 0.25 to 0.5% so it is actually quite significant.

This divergence massively impacts the supply/demand of the pair, YEN's supply increases, whilst demand for USD deposits increases, which SHOULD push the pair much higher.
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QuantumLogicTrading JohnKer
6 months ago
With regard to " i dont believe there is a correlation between the yen and SPX", there is a strong correlation between the two. Most people know that the JPY is a "safety" asset that investors seek in times of uncertainty/volatility - just like bonds and Gold.

Please see the article i posted trying to show the degree of the correlation.

I do agree that in some circumstances correlations are drawn naively but in this example it is true.. infact there are few examples of where there isnt correlation either positive or negatively because all financial markets are linked in one way or another as investors only have a limited choice of where to allocate their assets for a return.
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JohnKer PRO QuantumLogicTrading
6 months ago
Yes, but there is another problem you have. As soon as someone sees a correlation that is about the time it changes. Noting my critiques, if wrong, help you strengthen your argument. Happy trading.
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QuantumLogicTrading JohnKer
6 months ago
i disagree.. gold and bond and yen have been risk-off assets since the begining.. do you agree that gold and bonds are negatively correlated with stocks/equity?
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JohnKer PRO QuantumLogicTrading
6 months ago
They are not always....that is the problem with correlation.
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QuantumLogicTrading JohnKer
6 months ago
in strong markets the negative correlation is almost always 80%+. this imo is undeniable!

However, please dont confuse my bid for correlation as a statement of "correlation is causality". If i was saying correlation was causality, you would be right, correlation wouldn't be around for long as people would notice and it would become priced out.

Correlation is merely imo, viewing two assets move at the same time together or against to some degree - one asset doesnt cause the other to move however.

If this was the case, then everyone would be able to arbitrage profit which ofc is impossible.
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QuantumLogicTrading JohnKer
6 months ago
IS YEN REALLY RISK-OFF AND CORRELATED TO SPX (RISK-ON)?


Thanks for your feedback, i enjoy the discussion.
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Quant QuantumLogicTrading
6 months ago
Abe is currently executed Dr. Bernacke's playbook to fight deflation just the Super Mario. The was givin by Ben I think in 2001 0r so. I good read. Race debase fiat currency would be a more proper view for your work. ty.
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QuantumLogicTrading Quant
6 months ago
thanks for the comment.. not sure what you said though, what does "Race debase fiat currency would be a more proper view for your work" mean?
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Quant QuantumLogicTrading
6 months ago
Currency Wars. Debasing a currency to get edge on exports. This happens through out history, the Germans did it before the war, the British force the countries they colonize to buy their goods. Same concept. why u here say the yuan is under value. The week euro is good for their exports. Game theory. Watch what they do not what they say, the Bond market has been calling FEDS bluff. Check out TNX chart sense 1980. Cental planners what to get or take 500 euro out circulation Summers wants 100 bill out of circualtion. Been in this Profession sinse 2000 when pound was 2/1 to $ euro nations came out with eoru in about 1999, i think 1.5 0r so $
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QuantumLogicTrading Quant
6 months ago
yes i understand what you are saying.. in this piece i was talking about JPY being a risk-off/safe asset and how it is negatively correlated with risk markets like the SPX.
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Quant Quant
6 months ago
http://www.federalreserve.gov/boarddocs/Speeches/2002/20021121/default.htm

enjoy the read.
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QuantumLogicTrading Quant
6 months ago
on friday 10y yields got hammered tnx and tny, risk-off assets xauusd, usdjpy and US1! bonds all rocketed.. in my opinion, this was because the market actually took the report as hawkish, hence why risk traded bid and sold off - increased probability of hiking meant risk markets are less attractive hence the flee to safety?
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QuantumLogicTrading Quant
6 months ago
also check -
IS YEN REALLY RISK-OFF AND CORRELATED TO SPX (RISK-ON)?


this was my follow up article regarding this matter
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