Friday, January 15, 2010

Intermarket Themes Among Asset Classes

The very first theme I try to identify when I power up my computer in the morning is whether global investors are risk-seeking, risk-avoidant, or trading a mixed risk picture. This generally corresponds to whether those investors and traders are positioning themselves for global growth/expansion or for economic weakness/contraction.

Risk-seeking themes show up as:

* Buying commodities, such as oil and copper;

* Buying the currencies of growing economies (and economies exposed to emerging economies) vs. USD;

* Selling U.S. Treasuries (rising bond yields);

* Buying growth oriented stock sectors (small caps, tech) vs. blue chip indexes;

* Buying stocks from emerging markets vs. U.S.;

* Buying speculative credit vs. Treasury debt.

Risk-avoidant themes typically embody the reverse. When we don't see risk-related assets moving in unison, often we get a range, consolidation trade in which assets are reallocated within markets and sectors.

Catching the mood of large investors early in the trading day can often help traders exploit these themes on a day timeframe. It also can help traders avoid getting run over by fighting the intermarket tides.