Correlation analysis is not a measure of cause and effect, but it is a good tool for measuring the strength of the relationship between two data series. For example, the theory that a weak dollar and strong international demand for commodities is a good fundamental backdrop for companies exporting commodity products was supported by the correlation analysis of the euro vs. the CRX. There was a higher positive correlation between the euro and the CRX than other stock market indices.
However, the analysis also showed how this relationship could break down as investors and traders are gripped by an overriding market theme — in this case, the very strong uptrend in oil. Tracking various inter market relationships and their correlations can keep you on the right side of trends when they are working and alert you to when these relationships are breaking down.
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