Week MST

Three-Month MST

    Note how the three-month spanning tree has much deeper branching than the past week's tree.  This further demonstrates the divergence of global market's correlation with each other that I'd mentioned last week.  Compared to last week, however, note how much more branching there is from the Netherlands fund EWN.  This perhaps indicates that, as liquidity dries up and uncertainty remains, attention is focusing on certain specific markets (primarily the US, certain European countries, and Brazil).

Week MST

Three-Month MST

    I've covered the minimum spanning tree for the MSCI ETFs over the YTD and the entire ETF/CEF market and its categories in past posts, but here is a new MST for the last month of trading (as of last night's close).  As I've discussed before, if you're going to invest in country-specific ETFs as many suggest, make sure you pick countries that are as distant from each other as possible.

    Granted, this is based on correlation over the last month, so this is really more descriptive of market structure than actually useful for long-term investments.  As such a look into the market structure, here are the things I note:

• France and Germany are perhaps the two economies that have seen the most change in the YTD, but the Netherlands MSCI Index continues to be a better country-specific proxy for Europe's growth trend. 
• In the past month, Australia has been moving more in sync with European markets than previously.  Expect this correlation to reverse in a bearish market, especially if commodity prices remain elevated (and the Australian economy is not too badly shaken by drought).
• Malaysia is a good proxy for all of non-China Asia except for Japan, which is more strongly correlated with Canada.
• Every single European fund is more correlated to Malaysia than to the S&P 500.

Overall ETF Category Performance

    For securities with underlying valuations that are difficult to calculate, the 200-session moving average is a good indicator of "underlying value."  Furthermore, this price represents a good technical trading equilibrium.  As I demonstrate with the S&P 500 ETF tracker, using this technique can give you better odds of timing the market to reduce your risk. 

Update @ 10:20: It looks like Brazil's central bank just went in to follow Columbia's recent move, offering $600M worth of reverse swaps to slow the real's apprecation.  Though there's no CurrencyShares ETF for Brazil, expect possible reprocussions for the S&P Latin America 40 Index as more countries in the region follow suit.

    Bespoke had a great article over at Seeking Alpha today about global markets and their position relative to their Bollinger Bands.  This is nicely timed as well, since there are a number of events today relative to Bollinger bands and emerging markets.

    As I'm young and still have that impatient trading blood in me, the slower, more number-oriented analysis is sometimes a drag. The thrill of the split-second order motivated by chart, fundamental, or Level II is still tempting for me, and though we all eventually mature into more conservative investors, there's still nothing that feels better than a well-placed swing play or dynamite option trade. To get this out of my system, I've decided to talk all these ideas out here. So, time to digest the night's news and speculate on tomorrow's profits.

    When analyzing the structure of a market, one of the commonly leveraged tools is the minimum spanning tree (MST).  Calculated based on the correlation between the return of assets in a market, the MST represents asset clustering and overall structure in an intuitive and graphical way.

    Though this sounds overly abstract and devoid of application, the MST often serves as a good check for portfolio allocation.  In order to obtain optimal portfolios for realistic investment goals, you simply must diversify at least somewhat.  Diversification, however, comes at an additional cost to managing the portfolio.  The constraints here are that you need to achieve reasonable diversification with the least cost possible.