Many markets are interrelated. These interrelationships can offer predictive capabilities for many markets. The study of these interrelationships is called cross-market analysis.

Standard cross-market correlations are not useful if our goal is to predict future prices or generate profitable signals because the current correlation tells us nothing about future prices.

A methodology that allows us to measure the predictive power of a relationship between markets is the so-called divergence between markets. Other inter-market relationship processing methodologies to develop trading signals might also work during sample periods, but do not work as well during forward periods and during actual trading.

A widely known cross-market relationship is that between the S&P 500 and the 30-year Treasury note. Bond prices are generally positively correlated with the S&P 500 (while yields are negatively correlated), although this is not always true, bonds should generally lead stocks at turning points. Another important fact is that one of the best trades you can make on the S&P 500 is when the 30-year Treasury diverges from the S&P 500; For example, when (a) bonds are going up and the S&P 500 is going down, buy the S&P 500 and (b) bonds are going down and the S&P 500 is going up, sell the S&P 500. Although this relationship has broken down in the In recent years, their long-term existence is of historical importance to the science of cross-market analysis.

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