Are NQ and ES Correlated?
Introduction
The claim under investigation is whether the Nasdaq 100 futures (NQ) and the S&P 500 futures (ES) exhibit a correlation in their price movements. This inquiry is significant for traders and investors who rely on the relationship between these indices to inform their trading strategies and portfolio management decisions.
What We Know
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Correlation Values: Different sources report varying correlation coefficients between NQ and ES. PortfoliosLab states that the correlation is 0.88, indicating a strong positive relationship between the two indices, suggesting they tend to move in the same direction 1. Conversely, another entry from the same site reports a correlation of 0.25, which would imply a low correlation and minimal relationship in their price movements 4.
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General Observations: According to Seeking Alpha, NQ and ES generally move together, indicating a positive correlation, although there are instances when one index diverges from the other 2. Similarly, a discussion on Elite Trader notes that while the two indices are generally correlated, external factors like earnings announcements can disrupt this relationship 7.
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Long-term Trends: A video analysis on YouTube suggests that, over the long term, NQ and ES maintain a strong correlation, with both indices typically trending in the same direction 8. This aligns with the perspective that understanding correlations can enhance trading strategies, particularly in futures markets 5.
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Market Dynamics: The correlation between these indices can fluctuate based on market conditions. For instance, during specific market phases, such as the end of a bear market, the performance of NQ may significantly diverge from ES, as noted in discussions about market behavior 7.
Analysis
The varying correlation coefficients reported by different sources raise questions about the reliability of the data. The discrepancy between a high correlation of 0.88 and a low correlation of 0.25 suggests that either the methodologies used to calculate these correlations differ significantly or that the data may be outdated or context-specific.
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Source Reliability: PortfoliosLab provides quantitative data but lacks transparency regarding the methodology used to derive the correlation coefficients. Without knowing how the data was collected or the time frame considered, the reliability of these figures is questionable. Seeking Alpha, while providing qualitative insights, is a platform that often includes opinion-based content, which may introduce bias 2.
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Potential Conflicts of Interest: Some sources, such as trading platforms or financial advisory services, may have vested interests in promoting certain trading strategies or products. This could lead to biased interpretations of correlation data. For instance, if a source is promoting trading strategies based on the correlation, it may emphasize the positive aspects while downplaying instances of divergence.
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Methodological Concerns: The methodologies for calculating correlation can vary widely. For example, correlations can be calculated over different time frames (daily, weekly, monthly), and the choice of time period can significantly impact the results. Additionally, the presence of outliers or market anomalies during the period studied can skew correlation results.
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Contextual Factors: The correlation between NQ and ES is not static and can be influenced by broader market trends, economic indicators, and specific events (e.g., earnings reports, geopolitical events). Understanding these contextual factors is crucial for interpreting correlation data accurately.
Conclusion
Verdict: Partially True
The investigation into the correlation between Nasdaq 100 futures (NQ) and S&P 500 futures (ES) reveals a complex picture. While some sources report a strong correlation of 0.88, others indicate a much lower correlation of 0.25. This inconsistency suggests that while there is evidence of a correlation, it is not uniformly strong across all contexts or time frames.
The nuances of market dynamics, external factors, and the methodologies used to calculate correlation contribute to this uncertainty. For instance, the correlation may be stronger during certain market conditions but can diverge significantly during others, such as earnings announcements or shifts in market sentiment.
It is important to acknowledge the limitations in the available evidence, particularly regarding the reliability of the sources and the potential for bias. The varying methodologies and time frames used to assess correlation further complicate the interpretation of these findings.
Readers are encouraged to critically evaluate the information presented and consider the context in which these correlations are observed, as well as the limitations of the data sources.
Sources
- PortfoliosLab. "NQ=F vs. ES=F — Investment Comparison Tool." PortfoliosLab
- Seeking Alpha. "Correlations - A Useful Odds Enhancer." Seeking Alpha
- YouTube. "Cracking the Code: NQ and ES Market Correlations Revealed." YouTube
- PortfoliosLab. "NQ=F vs. ES — Investment Comparison Tool." PortfoliosLab
- E.G. Indicators. "Correlation as a Confluence Method." E.G. Indicators
- YouTube. "The Best Relative Strength Indicator For ES & NQ." YouTube
- Elite Trader. "How correlated are ES, YM, and NQ?" Elite Trader
- YouTube. "NQ vs ES Order Flow Which Is Better For Trading Using ...". YouTube
- TradingView. "NQ vs ES — Indicator by deivydas.rapalis." TradingView
- TastyLive. "What is Pairs Trading? How to Pair Trade?" TastyLive
