Comparing SPX and MSCI Price Action

Today CBOE set the date (pending regulatory approval) for the launch of trading of the MSCI EAFE (EAFE) and MSCI Emerging Markets (EEM) index options. Recently I was at a conference where an individual trader told me all he trades is SPX.   He said he loves (his words not mine) the cash settlement feature of SPX options. He went on to say he’d been looking around for another index option market to trade and said he felt EAFE and EEM were going to give him that opportunity. Whenever someone makes a statement that needs to be backed up by data I get to number crunching. The first table below takes the weekly performance for the S&P 500, Russell 2000, EAFE, and EEM indexes from January 2000 through the end of 2014 and looks at the correlations among these markets.


Note the correlation between the S&P 500 and both EAFE and EEM is lower than the relationship between the Russell 2000 and the S&P 500. This is especially true with EEM which is 0.69 correlated with the S&P 500.   That’s a great number, but what traders are really interested in is short term price movements. I ran another quick test, actually two tests to check into relative weekly price changes.

Over the 15 year period from 2000 to 2014 there were 782 weekly observations. The S&P 500 was higher 428 weeks and lower 354 weeks. The next two tables show what EAFE and EEM did when the S&P 500 was higher and what the MSCI index price action was when the S&P 500 lost value.

This table shows that EAFE was up 81.3% of weeks when the S&P 500 was higher and EEM was up 79% of those positive weeks for the S&P 500. Flipping this around, 20% of the time that the S&P 500 rose these two indexes lost value or one in every five weeks.

S&P 500 Higher

The second table shows that EAFE was down 77.4% of the time when the S&P 500 lost value and EEM was lower 72.3% of weeks when the S&P 500 was lower. We can roughly take this as the two MSCI Indexes rise one out of every four weeks when the S&P 500 is lower.

S&P 500 Lower

It appears the numbers back up the idea that MSCI Index options will provide traders with different opportunities than SPX options. It also appears that there is a close enough relationship between SPX, RUT, EAFE, and EEM options that relative value trading opportunities will abound as well. That thought has me back to number crunching, I’ll return to this space with some more thoughts about trading these markets in tandem next week.