Using the Euro to Predict the S&P500
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.