Increased correlation equals increased risk

News. In the past few years, many investors have concluded that commodities like oil, corn and gold offer independent returns that can diversify away the risks of stocks. But the correlations between stocks and commodities—the extent to which their prices move together—are in many cases the highest they have been in nearly 30 years.

This year, about 40% of the weekly movements in the S&P 500 index can be explained by weekly fluctuations in energy prices, says Michele Gambera, head of quantitative analysis at UBS Global Asset Management. That is twice the level of similarity over the past five years and roughly 20 times the level of the past two decades.

My point. I believe that because of this increased correlation, it is becoming crucial investors use a market timing model to understand and evaluate risk.

George Dagnino, PhD
Editor, The Peter Dag Portfolio. Since 1977
Ranked best market timer in the 12 and 6 months ending 8/20/10 by Timer Digest

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