Stock Market Risk: Correlation and Triple top 26-Nov-2014

In the market crisis, such as Lehman crisis, stock prices have going down simultaneously in global markets. Uncertainty is always related with Correlation.

I. Correlation

You might have wondered that global stock markets are correlated each other. Last month of Oct-2014, stock indices in global market has been steeply declined simultaneously only except for Chinese market, Indian market or a few others. (See the post.)

Statistically, correlation among global stock indices exists. A below table shows correlation matrix among some major stock indices, which has been estimated from last 18 years. (Click to see in large scale)

Elements whose correlation is more than 50% is filled in blue. You see those stock indices are highly correlated each other.

Although each stock index is dominated in each domestic currency and FX effect exists in measuring, the higher correlation implies those stock indices tend to go up or down at the same time.

Statistics tells us that global stock indices seem be highly correlated each other.

II. Triple top

The idea of triple top may not scientific, but it says stock value is going down after the value has reached at top three times. Naysayers will say it is case by case in scaling of chart, how to define the top, ....

However, the most major indices, FTSE 100 and Dow Jones Industrial Average, are described with triple top for last 18 years. Applied trend & momentum fitting, the right figure implies somehow market cycle is observed and the current market seems be near the top of a cycle.

Obviously, this is just statistics and out of fundamentals discussion. But to avoid uncertain disaster, we must keep structure of our own portfolio in mind and restructure as necessary.