Correlation in Financial Markets (Interest Rates, inflation, currencies, commodities, etc.)

[Óttar]

So this past month, I've taken an absolute beating trading on the stock market (I still have most of my trading account, but I've lost quite a bit). This losing streak has forced me to look at the bigger picture of the overall market. I watch the direction of the S&P 500 and Dow Jones everyday and try to stay up to date on sectors and international markets.

The Federal Reserve is expected to raise interest rates during their next two meetings on Nov. 8th and December 19th. I read somewhere that raising interest rates is good because it attracts foreign investment. Today, I was told this:

"All assets: Bonds, stocks, and commodities all rise with inflation. The FED raising interest rates means they raise interest on loans and credit. This means loans will be expensive meaning less money in circulation until they lower rates again. This will cause panic selling in oil because it's artificially inflated and at risk of falling because banks prefer holding equity stocks (technology, biotech/pharma, and banks) over oil. Much less capital will be available for an already developed sector (oil). In short, FEDs raising interest rates will fight inflation, essentially deflating the economy (causing an intentional recession) because inflation left unchecked could cause an even greater recession, so it's better now than later."

I'd like to know about some good books on the correlation between commodities and other financial instruments and institutions, currencies, etc. and how they are correlated.

[Óttar]

I've been recommended the following books: The Intelligent Investor, Security Analysis, and The Interpretation of Financial Statements by Benjamin Graham.

and

Irrational Exuberance by Robert J. Shiller.

[catgeorge]

Hi Ottar,

Unfortunately the markets are correlated is largely mythmaking correlations exist 50% of the time and 50% of the time it does not. So don't pay too much attention to conjure strategies. If the markets are perfectly correlated we will all be trillionaires.

Some factors to watch out for when putting your money on the line.

Money flow - paying attention to money flow is super important , you will avoid being exposed to bloated over priced assets and identify assets which are unloved where cyclically speaking money will flow into that sector group (i.e, out of energy and into cyclicals). So you are looking for bargains. Very important

Position sizing - if you are willing to risk $100k per position dont put the whole lot in. Play it smart - start with $50k if it falls down a little further (remember you are bargain hunting not trading overbought trends) then buy a little more maybe another $10k. Don't risk the whole lot at one specific price. If it starts running leave it and diversify with the other $50k

Quality assets and information - buying quality assets at cyclical lows with 3-6 month time frame will work in your favour. As a starting point I would suggest only focus stocks on DOW and Nasdaq 100 ONLY. A simple strategy would be buying the asset when RSI 14 dips below 25 when it does, research the company financial statements:- you want to see EPS growth , operating margins improving, leverage less than 2x, forward PE lowering, EBITDA growth, Net income growth.

Good luck mate.