Market Observation

Have been non-formally tracking US stock market opens for awhile now. The gaps between previous day’s close and today’s open have seemed to me to be far more important in daily market moves than the intraday trading moves. And they frequently send conflicting signals – eg a gap up open today followed by what so far is a big fade/selloff.

Finally though I got an idea of why that stuff may be happening. Today the US market opened up 0.86% because the euro rose by 0.80% against the dollar compared to yesterdays close. Always knew that markets were arbitraged between index spot and index futures (the “futures fair value”) but that is always a very minor difference (barring some obvious explainable external news shock). But this coincidence today made me realize that this arbitrage happens everywhere — by all big global investment houses — in their own currency. Once the market opened, US investors (thinking in dollar terms) are now selling off an overbought market that the technicals indicate needs a selloff.

So despite the news headline fakeouts that purport to “explain” these changes in terms of what seem to be pre-open nonsense; one big underlying reason for short-term stock market volatility seems to be currency volatility – not projections of economics/earnings.

As long as currencies remain volatile against each other — and that is one trend I don’t expect to change as long as growth remains slow/negative and financial systems are still in crisis/recovery mode – then timing out currency investment will actually provide a large portion of the total return on investment for anything denominated in or dependent on that currency. Without the need to take on liquidity/credit risk (bond market) or growth/credit risk (equities).

In today’s case, my FXE and FXF captured the gains from the dollar sinking overnight — but haven’t faltered with the selloff in the US stock market today. My short equities position (which I would have been tempted to sell early on because it appeared that my technical analysis for the stock market was wrong and that the predicted selloff was over) has captured the gains from the intraday post-open sell off.

It is days like today — where you think you’re OK if you’re in US$ cash because you are avoiding an equities selloff — that actually put you behind. Because US$ cash holdings have dropped in value. Not relative to gold — which isn’t moving much today — but relative to foreign currencies.

I’m gonna have to tweak my technical analysis a bit. Pay more attention to possible divergences between on-balance volume and accumulation/distribution. Not so much at the overall “market” level — but for individual stock ideas to see how much those stocks are just “following an index” and how much they are moving on their own.

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