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Using the Euro to Predict the S&P500

June 3, 2010

It is not surprising that the threat of the dissolution of the Euro has been a major market influence these days. But one would expect that such a relationship would be coincidental rather than predictive. Over the past 50 days one would have made a 10.42% return by simply trading the SPY based on today’s direction in the Euro using FXE as a proxy. Thus if the Euro went up today, you would go long the SPY, and if it went down today you would go short the SPY. This model has had 60% accuracy at predicting the next day SPY return, and has made an average return of .19% per day.  Using the same model over a longer period would have resulted in significant losses–a -8.4% CAGR since the inception of the FXE. It brings up the important of paying attention to inter-market relationships–primarily when the underlying factor makes a high degree of logical sense.

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3 Comments leave one →
  1. Keith Piccirillo permalink
    June 5, 2010 3:17 pm

    What could cause this drift over time intervals?
    Hedge funds have been having a bad time, maybe they have switched books more to short positions and lessened their commodity carry trade recently.

    • david varadi permalink*
      June 6, 2010 4:36 pm

      hi keith, i agree that the carry trade is the real reason that this effect is happening. there is greater follow through due to margin calls when the euro goes against the large speculators. its something to keep an eye on.
      best
      dv

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