How to Read Market Sector Sensitivity

Posted on Thursday, October 25, 2018 at 4:32 PM

In the daily futures class, we search many markets for patterns that typically precede the start of a trend, as well as the setups that often occur when a trend is near an end. Our approach to trading is determined by pattern probabilities and relationships among commodity sectors.

Recently the stock market has taken some big hits. Such extreme moves frequently reveal relationships in the financial markets. When equities fell due to a rise in inflationary expectations, havens such as interest rate, currency and gold futures, and ETFs did not respond with big rallies. However, the usual safe-haven markets do rise when equities decline due to political unrest, tough tariff talk, border conflict and terrorist threats.

Gold has been a hedge against the dollar for quite some time. Currently, that inverse relationship has changed. Gold has strengthened lately and so has the U.S. dollar. The explanation for this may have to do with the European Central Bank’s issue with Italy, Brexit and border conflict with Mexico. Using the ETF GLD as a hedge against a falling DIA can work in the right environment. Buying GLD and selling the dollar is not a good hedge for the time being.

A move in one financial asset often has a trickle-down effect. Interest rates are connected to stocks, and a move in stocks may affect precious metals, which may alter exchange rates. And a change in currency will have an impact on commodities such as grains, coffee, sugar, etc.

Being technically sound does not always refer to reading charts with skill. We can learn to be fundamentally proficient using technicals to identify changes in economic relationships. Pay special attention to price spikes when event risk is high. Check your calendar for reports that include employment and inflation numbers. These data have had more impact than housing or sales reports. And of course, check for Dow 30 stocks earnings reports. They affect the indexes, and big moves in them have really caused a stir in other financial assets. 

John Seguin
Senior Futures Instructor
Market Mentor Mentoring, Inc.

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