Will the US-European Stock Markets Decoupling Continue Into the Next Year?

The coupling of major stock markets in US and Europe has been on the rise for the last 20 years. An effect of this coupling has been the high coordination in the sign of daily changes of major market indices. During 2011, the DAX, the FTSE and the CAC 40 rose or fell in sync with S&P 500 nearly 80% of the time on a daily basis. A decoupling effect was noticeable this year but indices were still coordinated about 72% of the time.

SPX_DAX_CAC_FTSE_COORD_20121214

The top pane is a chart of daily prices of S&P 500 since 1993. The other three panes show the value of the indicator COORDINATION on a rolling 250-day basis. The value of this indicator at every point is the percentage of coordinated up and down moves between S&P 500 and another index during the past N periods, in this case 250 days. The vertical blue marker was placed at the start of this year. It may be seen that for 2011, the value of the indicator for S&P 500 and DAX was 0.79, meaning that 79% of the time the up and down changes of these two markets were coordinated.  The same was the case for S&P 500 and CAC 40, as shown on the third pane. For S&P 500 and FTSE, the indicator value was at 0.76 at the beginning of this year. As of the close of Friday, the values of the indicator are at 0.74, 0.71 and 0.72, as shown on the right.

It is clear then that a slight decoupling has taken place during 2012. However, it is also evident from the charts that the longer-tern trend is up. Back in 1994 the daily changes of these markets were less than 50% coordinated or coupled with the corresponding daily changes of S&P 500. Globalization and information technology have been the major drive behind the increased coupling between the various stock market indices. As a result, these markets now belong to the same class of investment assets, individually offering no diversification benefits to investors in that class. However, the decoupling may continue for a while. As it may be seen from the chart, around 0.66 or 66% is the level which will signal that longer-term coupling is no longer in effect. If and when that happens, it may be an indication of informed investors having a longer-term view about the prospects in these four markets, whatever that may be at that time. We just have to watch to find out.

Disclosure: no relevant position at the time of this post and no plans to initiate any positions within the next 72 hours.. 

Charting program: Amibroker (Charts created with AmiBroker – advanced charting and technical analysis software. http://www.amibroker.com/”) 

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