Correlation

Correlation is a measure of the statistical relationship between two comparable time series. For investors, these series may be two commodities, two stocks, a stock and an index or even a stock and a commodity. The relationship, which can be causal, complementary, parallel or reciprocal, is stated as the correlation coefficient and always reflects the simultaneous change in value of the pairs of numerical values over time. View the correlation coefficient, which lies between the range of -1.00 to +1.00, as a positive or negative probability that the members of a market pair relate to each other. A negative reading suggests that one member of the pair consistently moves up while the other moves down. Conversely a positive reading suggests there is a tendency for the pair of markets move together in the same direction. A correlation coefficient very close to 0.00 means the two markets have no correlation, indicating that their statistical relationship is completely random. Perfect correlation is found only in markets that are truly identical, such as an index that is reported in two different ways. Such situations are unlikely to be present in our reports. However, many markets that are linked by industry, market segment, substitutability and other factors exhibit a high degree of correlation. For example, CBT Soybeans and CBT Corn are highly correlated because they share growing seasons at similar latitudes, climate, a common currency, fuel costs and transportation needs. Their correlation coefficient of +0.7595, at the time this report was written, reflects their shared circumstances which is somewhat less than perfect, but remain very noteable.