Tuesday, August 12, 2008

Catching the Market's Themes

I once again want to thank those who have recently emailed regarding the Twitter posts. These are my way of trying to alert readers to important market themes and developments, so that you can make sense of the coming day's action.

Recently we've seen a number of interwoven themes: strong U.S. stocks and U.S. dollar; weaker stocks and currencies overseas; and falling commodity prices. All of these are reflections of the relative concerns investors and traders are placing on global recession relative to global inflation.

With ETFs, it's easier than ever to track movements in the U.S. dollar (UUP), commodities (DBC), oil (USO), gold (GLD), overseas stocks (EFA, EEM), and Treasury instruments (SHY, TLT). A review of those charts, along with the charts for stock sector ETFs, provides an excellent view of the rise and fall of various themes.

When psychologists listen to clients, they listen for themes: broad issues that connect the dots of various life events. A client may talk about relationship problems and then suddenly switch gears and discuss trading challenges. On the surface, it looks like a total change of topic. But the psychologist is aware of themes and knows that the real issue is dealing with potential loss.

Similarly, these may look like different markets, but in a world of globalization and instant information flows, they respond to the same themes: inflation worries, recession concerns, risk-seeking, risk-aversion, central bank shifts in outlook (and eventually rates), etc. Once you know those themes, you can see one market move and anticipate movements in other, related ones. That is helpful whether you're a daytrader, swing trader, or longer-term investor.


Trading by Intermarket Themes