The first plot above shows where the most recent 65 days of the SPY has reasonable correlation to periods in the past. The red lines mark the times where the current 65 days match the past. As you can see, these times were not very advantageous points to buy SPY.
My 'Intermediate Term Outlook' post in September showed the same type of plot from the September point of view. That plot is the second plot above. The high correlation points since 2003 were just prior to significant moves up, which is what has happened in the last month.
Perhaps examining intermediate term correlations can provide useful perspective about the current market's potential. Caution is advised as the number of samples is very small.
I will be examining sectors and individual stocks with this same approach to see if it is useful as an additional element of my trading approach. I will provide an update in a later post.
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