81.3% Correlation! December 26, 2008
Posted by Aziz in analysis, kuwait.Tags: KSE, Oil
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The chart above plots two interesting highly correlated assets if I may say, the Kuwaiti Stock Exchange (White line) and the price of the NYMEX Crude Oil (Orange line). the reason I chose the period between 2006 and 2008 is to show how they behave in a bull, bear market and at reversal points.
What I did was create a correlation matrix of the monthly closing of these two assets and I was amazed by the high correlation; yes I did know they are highly correlated but I thought something like 30-40%, they are positively correlated over the past 2 years with a correlation coefficient of .813 (81.3%)!!
As you can see from the chart above and the correlation coefficient it’s clearly that these two are highly expected to move together to the same side. the period between Dec of 2007 until July 2007 they both went up approx. 57% then after that within a period of couple of days they both started the reversal process only to see them both fall 47% of their july highs by Today!
By observing the chart a little closer I noticed one thing but I can’t bet on it (it’s only an observation and no basis for it), if you look at the two up moves between Dec. of 2006 and Jul. of 2008 it has always been more aggressive by the KSE index which I can only imagine is caused by the nature of our speculative investors in the KSE.
This topic has always been on my mind and I want to research few more things in it. what I want is to hope fully find out how these two exactly behave in bull market , bear market, or how to identify a reversal point based on a more quantitative research and facts, not by observing whats on plotted on the chart.
The reason behind this interest is to find out if the falling price of Oil is causing the Kuwait market to fall and what if oil start rebounding, will it help the market even if we are going through this unseen financial conditions?
your input on this topis is highly appreciated.
Articles I used for this post:
- Oil key in influencing KSE activity
- Dynamic relationships among GCC stock markets and NYMEX oil futures
Great find, I always knew they where related but not to such a close extent. Did you notice that the KSE index moves before the price of oil. I am now thinking it would be a good indicator to trade oil.
Let’s hope that our rulers, assembling on Monday and Tuesday for the GCC Summit in Muscat, will allow a 100-percent correlation between oil and the Al-Khaliji, the GCC single currency..
interesting info.
Many people would write a book based on what you just correlated. Well done.
Very interesting relationship. If you plot the two charts back to 1997 you would see how the market also crashed with the oil crash back then.
Nice post.
very interesting question…maye we should keep a close eye on oil prices in the coming months…don veto: i’ve been thinking about it as well.