It’s easy to be distracted by shiny objects, like the non-stop stock market rally since November. During this stellar bullish phase, have you taken a look what’s happened behind the scenes? Let’s focus our attention on other key related (correlated) markets and how they’ve behaved recently.
The top of the five-market grid is the S&P 500. Beneath that is the competing market US Treasuries (these markets tend to trade inverse – during good times, investors buy stocks while during ‘bad’ economic times they protect their capital with bonds). We then take a look at two specific commodities Gold and Oil – which march to their own beat. Finally we have the economically-sensitive US Dollar Index, our currency market.
From November through December, we had a VERY CLEAR pattern in money flow:
- IN TO Stocks, Crude Oil, and the US Dollar, all of which reflected economic optimism, and
- OUT OF ‘defensive’ markets US Treasuries and Gold.
However, from December to present, these trends shifted while stocks continued trading higher.
- Treasuries stabilized with a flat-to-rising retracement;
- Gold clearly reversed and trended higher
- Crude Oil remained trapped in a tiny trading range (flat/no money flow)
- and the US Dollar index traded lower into February’s recent bullish swing higher through the month.
While these markets behaved rationally (with retracements), stocks did not. The S&P 500 extended the rally without any type of meaningful retracement as buyers dominated sellers.
These trends are reflected not just in the US S&P 500, but also the EEM and EFA:
These popular ETFs similarly reversed higher in November and trended with the S&P 500 into February. The exception was a dip in December for Emerging Markets. Even if you just trade one of these related (correlated) markets, focus on the broader picture of money flow among markets and plan accordingly for shifts along the way.
For more daily updates from Corey, visit his blog at Afraid to Trade.com.