IFTA London - John J Murphy - Trading with Intermarket Analysis

thank you very much for that nice introduction happy to be here happy to be here in London at my age and happy to be anywhere but you know it's funny I I've been doing this a long time I won't tell you how long but many of you weren't alive when I started but I first I started technical analysis first in stocks and I went to commodities and I went back to stocks and I'd say the first 10 20 years of my career very traditional technical analysis you know the kind that you learned in Edwards and McGee and that type of stuff and I wrote a book about I don't know I don't know how long ago now maybe 30 years ago technical analysis of the futures markets which is really was my interests at that particular time and then later on the broadened it to the to the to the financial markets so I'd say the first half of my career very much traditional technical work somewhere along the line I made a wrong turn or something a detour I guess I call it and I think it was mainly because of my experience in the futures markets where in futures we were trading currencies commodities stocks bonds all that well that kind of stuff and I began to notice that you know these things there are relationships between these things and maybe maybe there's something useful here so I started to get involved in I didn't make up the term into market analysis I don't really know who maybe Martin Pring did I know he was doing a lot of this at that time into market analysis and that is really I still do a lot of the traditional stuff but but the inter market has really become the area that of my main interests and that's what I'm going to talk to you about today will try to talk a lot about the current markets as much as possible I'm not going to go into a lot of definitions because I assume most of you know something about this already but just for I just want to state very simply the term into market analysis into market is really the key it simply means that all the financial markets are interval Davida yesterday morning talk about multi asset analysis all of the markets everywhere in the world are correlated to one degree or another and as a technical analyst even though you may be looking at a chart of let's say the S&P 500 and looking at the 200-day moving average and all the traditional things into market work suggests you should also be watching what's happening in Germany well you should be watching what's happening in Europe well you should be watching what's happening to the dollar because it has a tremendous influence on what happens in the US markets now the US market is my main concern but I do follow the foreign markets quite a bit and I encourage American investors which is my primary I write at stockcharts.com I have a lot of foreign subscribers but I think it's safe to say the bulk of my audience is Americans so I always encourage them to look at what's happening overseas first of all you should be investing overseas but even if you're not because what happens overseas affects what happens in the States so I'm going to move through these very quickly hopefully there we go I'm not going to go into a basic explanation of all the relationships that would be really boring and it would take up all my time so I'm going to just focus on some of the current relationships that I see going on and hopefully you'll find this interesting I'm not sure that I'm going to tell you anything that you don't already know on one level of another but it may be helpful to kind of put it all together in one spot and see how it kind of all fits together I do an awful lot of ratio analysis other speakers have alluded to this relative strength analysis this is extremely important in into market work so we'll just work through ratio analysis shows that stocks are outperforming bonds we'll talk about that a little bit stocks are also outperforming commodities for the last couple of years that's the first time we saw that we've seen that in quite a while and there's a reason for that and also US stocks are global leaders which I'm sure you're aware of at this particular point we are at the moment the strongest stock market in the world for various reasons and then the the third the last well that there the implications of a stronger dollar actually the stronger dollar it has a lot to do with the the previous bullets there everyone's talking about the dollar now even the Federal Reserve is getting concerned about the dollar the risin of the dollar but we'll talk about that talk about that in a little bit gonna work your way through the charts I hope you can see the charts there's nothing overly complicated on them I'm not going to show you any technical indicators it's all overlay charts okay I want to start with this particular chart simply to kind of set the stage this is the chart of the S&P 500 and you can see that looks wrong one I'm wrong one wrong finger wrong hand you can see that we had been in a basically I hate to say a sideways trading range because this was very painful as you're all aware for about we were in a Lost Decade basically and in the spring of 2013 about a year and a half ago we broke out to the upside in my view this was a secular bear market and we came out of that in the spring of a 2013 when the S&P hit a new high and I happen to be one of those who believe that we have entered a new secular bull market so that that's very good by the way we are one of the few markets that has hit new highs as you're aware most most global markets around the world have not yet hit new highs of your market right now was actually testing its old highs here in Britain it's backing off a little bit but I want to make the point that that upside breakout in stocks actually set in set in motion a number of other into market relationships this next slide I hope you can see it the numbers the colors are a teeny bit faded on the screen but anyway all it is it's a simple ratio as I mentioned I do a lot of ratio analysis this is a ratio of stocks the S&P 500 divided by the price of the US Treasury bonds actually the 30-year bond and this type of chart is very useful because investors are always these two markets are always competing for investor funds so there were certain times you should be in bonds certain times you should be in in stocks when the ratio was falling for example from 2000 to 2003 and 2007 to whatever that was 2009 obviously bonds were the better place to be I notice however that in 2009 the ratio bottom it's also interesting by the way this may be just sheer luck as the professor talked about this morning we just may be pure luck but I find that interesting during two parallel trend lines on that right I didn't expect this to work this well notice that this the second bottom in 2009 bounced right at the lower trendline I found that interesting anyway so since then the ratio has been rising which means that stocks have been outperforming bonds but it wasn't until the spring of last year right here that the ratio actually broke this decade-long downtrend line that tells me if I'm reading this right that this this last decade that favored bonds over stocks for various reasons has now shifted in favor and now all these charts I'm serving about three or four weeks old they're not I submitted we have to submit we had a deadline for submitting these charts they're all about a month old but I don't think anything has changed too much so that suggests to me that we have come out of this Lost Decade of stocks and a bare amount I'm looking at the US market and so I think that for investors stocks are going to be a much better place to be than bonds over the over the next decade and these are very long-term trends we're talking about secular trends that could last anywhere from maybe maybe five to ten years now this next chart gets a teeny bit more complicated but it's not it's not that bad first of all the brown line the brown line that you can see on that it's another ratio this is the S&P 500 divided by the essent I'm sorry divided by the CRB index of commodity prices this is an index of 19 actively traded commodities and you can see that and the Green Line as you as you can see there is the dollar index and I when I'm looking at the currency I look at individual currencies but the dollar index is that as the US dollar against a basket of currencies of which the Euro by the way has the biggest waiting but anyway so I'm just kind of overlaid and you'll notice that the the ratio well first of all you can see that the ratio and the the Green Line tend to correlate example from roughly from roughly 2002 when the dollar peaked down to about here the ratio was falling which means during that period of time stocks underperformed commodities you can recall we had a big boom and come out of the prices during that that period of him so commodities were the better place to be right here when the dollar bottoms right here and the middle of 2008 right in the middle of the the financial crisis the dollar bottom that I don't know whether it was a flight to safety whatever the reason that vertical bar from that point on the dollar has been at least stable though hasn't gone up it's been stable it has turned up recently but since that time that has that has put downward pressure on commodity prices and as a result since that period of time stocks have been a much better investment than commodities and remains very much so today so one of the reasons for that is because there is an inverse correlation in fact the strongest into market relationship of all is the inverse correlation between the US dollar and commodity prices as you know you can see this just recently the dollar for example this dis charts about a month old but the dollar has hit a four-year high everyone's talking about the strong dollar that has pushed commodity prices into a real tailspin notice that a Brent crude is trading at a two-year low all come on the CRB index is at the lowest level in a year come out of the prices have really come under pressure there's some good and bad things in that if we have time maybe we'll get into that a little bit so it hits so the the direction of the dollar tells you whether you should be in stocks or commodities and at the moment stock said the bottom line is that over the last decades commodities and bonds did quite well places like gold for example right now stocks at least US stocks appear to be a better place to be not that they can't correct which I think they are in the process of but on a relative basis they are the better asset class another let's talk about gold we can't talk about commodities without talking about gold now the green area the same same dollar index because that's sort of the background the background filter here the the gold line here the this thing here this is also a ratio it's a very well-known ratio and into market analysis going back 40 50 years it's the Dow Industrials divided by gold okay and you can see for example during this period of time the ratio was rising in to about 2000 actually between 1980 and 2000 stocks were did much better than gold gold were in a secular bull market that I say that right yes stocks were in a secular bull market gold in a secular bear market they reversed trends in 2000 stocks entered a secular bear market and gold entered a secular bull market I hope I'm saying that right okay and you'll notice that and again a big reason why the gold did so well is because of the falling dollar again right around here this all began to change and notice that right here this ratio actually bottomed in 2011 I'm going to come back to why that happened and you'll notice that the ratio has turned up so the decade-long so although most of the last decade gold was a much better place to be than stocks US stocks that ratio has now turned up and this by the way is like a 10 year actually it's the third almost a 13 year trendline you know when major trend lines like that are broken that usually indicates major changes in trend so that upside breakout in stocks that we started with the first slide when when the S&P hit its record high in the spring of 2013 and began a secular bull market in my view that ended the bull market in gold gold is now in a major downtrend I don't think that's likely to change now you'll notice that although the dollar bottom tier gold this ratio didn't actually bottom until 2011 there's a reason why that happened in 2011 and let me bring a third thing in so let me let me just recoup gold gold can't stand move in the opposite direction of stock so the fact that stocks are in a bull market bad for gold the fact that the dollar is going up bad for gold but there's a third element and that is this thing right here which is US interest rates now and this is the price of gold obviously now I use the two year because although all the focus is on bond yields at the moment we're going to talk about that the real emphasis I think right now when where the real strength in the dollar was coming from is the fact that short-term rates are moving up now they're not moving up a lot in fact I've used a log scale here so that you could see it a little better I'm not saying it's moved up a lot but it has moved up but notice that this peak in oil I'm sorry in gold right here coincides exactly with the bottom here okay Gold tends to move in the opposite direction of interest rates for obvious reason Gold is an unyielding asset so when rates are low there's really no yield anywhere gold it becomes very attractive when when when rates start to move up and people start talking about the Fed raising interest rates that's normally bearish for gold so you can see that we've had this basically a short-term rates have been creeping up now for almost two years again not a lot but you can see the trend and you notice gold and gold looks like it's in a consolidometer descending triangle I think gold is gonna break down here even more okay so we'll talk about that a little bit so gold has a lot going against it and gold this sort of a sort of a proxy before for commodity prices to your yield we'll talk about that just a little bit more so that's just a quick run through some of the some of the basic into market relationships that I see going on in the states and how firms Inc sample asset allocation stocks bonds commodities and you can even go further with that you can break fixed income down into the various categories you can break stocks down into various sectors for example certain sectors of the market do well when the markets rise in certain for example just recently I'm diverging here just a teeny bit but just recently we've noticed in the states - the two strongest sectors in the market have become utilities and consumer staples if you look at the relative strength this is over the last month or so so normally when you see money flowing into consumer staples and utilities that's normally a sign the traders are turning very defensive in fact one of the weakest sectors in the stock market have been consumer discretionary stocks and industrial stocks they are they are economically sensitive groups so we also check these things so when you see that that going on beneath the surface that and by the way the reason utilities are going up is because bond yields are going down you consumer staples are very highly correlated to bonds so even within the market there there were there are layers and layers but I don't want to dwell on that too much I want to make sure I finish on time here the international implications of a rising dollar first of all a rising dollar tends to favor us over foreign stocks there were reasons for that also I want to show you that we are at a critical juncture right now in the in the global uptrend I'm not sure we can call it that anymore fe and am i shares are testing major overhead resistance barriers remember I wrote this a month ago so they've kind of rolled over a little bit and also I want to talk about something that maybe this is a maybe you don't need to hear this but because you're here in Europe but writing for an American audience I always point this out you're a weakness hurts stock ETFs and I'll talk about that in a second what I mean by that now let's go to the chart so sort of the same same flavor on the chart here the the green line that whoops I can't tell my left from my right there we go I'm in London I can't I get confused left and right people drive on the wrong side of the road I'm very confused this is the dollar index and you can see the same basic idea and coming up now this again it's over ratio it's all ratios this is a ratio of the S&P 500 dividing by the MS world x USA index so it's an index of foreign stocks I think it's mainly developed stocks of maybe seen emerging markets in there I'm not totally sure but anyway you can see that again the correlation to the dollar from this this area here from let's say 2002 to roughly 2008 when the US dollar was weak and foreign currencies were strong notice the ratio fallen when the ratio was fallen that means that the US market is underperforming or your markets out let's put the help put a positive spin on it however since this point here and you see the vertical line when the dollar hit bottom and have been slightly moving sideways with a slight upward buy from that point in time the ratio has been the US market has been the strongest market in the world okay and by the way so and that remains the case now again I must admit I do get into some fundamental stuff for example why would the dollar be stronger well because as I'll point out interest rates in the states are higher our economy is usually when you have a stronger currency it means that interest rates are a little bit higher or about to turn higher the economy is a little bit stronger so there are a lot of reasons for that but I don't always get into too much but anyway that's the that's that by the way there's another corollary maybe this isn't quite as strong but I've also noticed this and that is that when the dollar is weak and foreign stocks are rising faster emerging markets tend to be leaders and in this area here when the dollar is strong and is outperforming it doesn't mean foreign stocks are going down it just means that the u.s. is going up fist when the US market is outperforming emerging markets tend to be the weakest in other words develop markets tend to do a little better than emerging markets and I think that has to do with commodities well there's a lot of reasons a lot of the emerging markets are tied to commodities as you're aware so they tend to do better when commodities are strong and recently as you can see they tend not to do well when when commodities are weak also rising dollar and rising interest rates are generally not good for higher-yielding parts of the world like emerging markets but anyway I don't want to get into the weeds too much but that's one of the side effects now in answer market work I always try to blend into market principles with just traditional charting although I'm not doing a lot of traditional charting here I really believe me I do do it I just pointed out that although the US market let me point out let me show what this is this is simply the S&P 500 and you can see we're trading at record highs now if you're trading the S&P 500 and you're just looking at that and nothing else you say well we're going to the moon I mean there's there's no more resistance I mean we're at all-time highs there's no resistance on the charts anywhere so no reason why I shouldn't keep going up okay that's true if you're just looking at that but if you look around the world you'll see that there are certain other things going on now the blue bar is here that is the effets i shares no I don't know if I've already said this but I use ETFs almost that won't say almost exclusively but I'd use them quite a bit and I'll talk about that a little bit more Fei Europe Australasia and the Far East okay and you'll see that this hit a peak in 2007 they're moving in the same direction notice they do move in the same direction okay but notice that I published this short actually about a month ago on our on our website notice that we are right up against this high now as any Chartist knows whenever you're in a major uptrend and you reach a major peak like this very often it may go through eventually and I think it will eventually you know as well as I do especially if it's in somewhat of an overbought condition there's a good chance for a pullback people are gonna take profits of that well you're gonna get a pullback maybe not a big one but a pullback a correction a consolidation you're gonna see profit taken the reason I pointed that out was simply to be careful here because if the if the index of foreign developed stocks starts to correct to the downside and this is a logical spot for that to happen that's going to cause some problems in the US market maybe not big problems but it may stall this this advance and by the way as you're probably aware the real culprit here is you guys right here Europe Europe has been the real problem of far reach not so much but most of the weakness has been and you're not to know exactly where this is it's probably down here somewhere but as you know e futures have sold off okay but that we've but the whole point was simply to be a warning that to be careful in the US that this is a good time for a global correction and this is a chart of emerging markets EEM and you'll see the same thing now this chart goes back again to 2007 and nothing fancy here just draw a trendline you could do this with a pencil and a ruler which we used to do and my only thing my only warning to you is if you're gonna draw a trend lines on shorts make him sick trend lines big bold trend lines Marquez don't like they don't respect thin trend lines and also make sure you use very bold colors don't use yellow or pink or magenta markets don't respect those colors use purple black or in this case a nice thick red line usually works pretty well markets afraid of that but anyway notice 2007 this is just first first year of technical analysis right there and I was just pointing this out that I thought maybe this is a coincidence but at the exact point that the ephah shares that up against major resistance so is this so it simply means that no the overall chart looked bullish to mega you know longer-term but on a short to intermediate and you know in the longer term we were all dead so we live in the short intermediate term this is a likely spot for this to run into problems and start to correct okay which we which we have done so looking at the latitude charts suggest that we're due to some kind of a global pullback global correction not necessarily a terrible bear market but a correction and since the US market is correlated to these markets this is this is going to probably is going to cause some some problems in the US now this these next two slides you may very well be aware of this but I want to point it out anyway I always have to point this out to American investors who maybe aren't as sophisticated as you people since most of us who look at foreign markets use the ETF's one of the reasons by the way we look at the etf so much it's because they trade during the day it's a little harder for us to track your markets intraday but the ETFs do trade all day you notice now let me just point out what this is if I can figure it out the bars here are the dax and remember this is a month old okay the dax and the this kind of purplish line here these are germany i shares ewg okay and you see they generally trend in the same direction you notice the they peaked here in june they sold off and then they both rallied okay now they have both weakened since then but anyway the point is look at this rally in the decks look at how much higher this is and how much lower this is and I wanted to explain in fact this got back above its 200-day moving average which I'm not showing here and this was still well below it and I got questions from some of our subscribers well why is the performance it's so different you're probably aware of this this is purely currency in other words all foreign markets like Germany is traded as quoted in their local currency I assume you know this but I want to part of that anyway because it does have a bearing on chart analysis this is quarter than the the Euro the all ETFs are quoted in US dollars that traded in New York fact I think that's rather than the New York Stock Exchange they're traded in New York they are quoted in US dollars that makes a big difference so when the dollar is strong and the euro is weak let's put it this way the one quoted in the weaker currency will be stronger the one quoted than the stronger currency will be weaker does that make sense to you the one quoted in the dollar will be weaker so it's the fact that the URL was so weak and the dollar is so strong is the reason that this is underperforming now let me give you a better example this is a little more dramatic and I hope you can see this again it's all relative everything's relative the blue line there is a ratio simple ratio of the ewg germany i shares divided by the decks and again this goes back the dates are actually here September the 8th so almost exactly a month ago and by the way I apologize the carts of the dates aren't there along the bottom but I double-checked it this is about a two-year chart this goes back to the beginning of 2013 ok enough to take my word for that and the green area is the Euro and you'll notice it's almost a perfect correlation between the two what it simply means is that when the euro is rising the ewg will outperform the dax and that was this that was 2013 ok the euro is strong the ewg which is quoted in dollars we'll be weaker right around here right around May of this year you can see when the Euro started sliding from that point on the ewg has underperformed and that's because the ewg is quoted in dollars and the dollar was soaring so that tends to push down its value so if you're an American investor I tell them look if you're going to invest in in anywhere overseas first of all the the ETF gives you a much better sense of your profits and losses because it immediately filters the view of the currency translation into it you have to figure you have to look at the currency if you're buying if you're buying stocks in Germany or Japan for example you're also buying the currency so if stocks are falling your annulment you're not only gonna lose on the currency you're also gonna lose on the stocks okay by the way there is I'm gonna come back to this later about just make a point here there are new group of ETFs that have come out exchange-traded funds that hedge out the currency in fact I just wrote an article recently on one and there is one very popular one in for the eurozone HED J WisdomTree I don't know you're familiar with WisdomTree they have a lot of very innovative ETFs that hedge out the currency risk HED J is the wisdom tree a Europe hedged stock fund something like that if you were to look at it it's up here some it's it's fallen but it's not falling nearly as much it filters out the the influence of it of the currency I just want to point this out maybe you're already aware of this maybe there's no need to do this unfortunately not unfortunately I've also found that very often the ETF does tend to lead the cash index so that's not necessarily good news I know your Dax is down here testing its lows for the year the ETF is already broken it by a bit by a big margin I think is trading at the lowest that's not necessarily a good sign okay okay so let me I'm gonna come back to that I'm gonna come back to that a little bit later and show you how that works out now let's talk about interest rate and I'll apologize if this sounds like fundamental analysis but the you know we're sort of blending the to bear in mind everything I'm doing I'm looking at charts I'm not really talking economic and just looking at charts okay falling German bond yields have contributed to lower that should be yields really bond yields we'll talk about that also we'll talk about two s the implications of the u.s. two-year yield hitting a three-year high and also this last when using an ETF to hedge the negative effect of a falling yen okay so let's get through this these are all very simple charts this is a chart of the the 10-year yield in the States and this is the 10-year yield in Germany I'll just point out that notice that close correlation between the two and by the way this is the correlation coefficient along the bottom they have a cold list they have a correlation coefficient of almost 90 percent in the states that we may have heard this items and one of the speakers talked about this yesterday I think in the state's first several months of this year there was tremendous amount of confusion that was confused myself along with everybody else with the stock market going up and the US economy strengthening and the Fed tapering everybody thought bond yields were going to go up in the States member we had the big run-up last year and everybody thought and everybody was wrong including myself for a while anyway and I know you know the bond market falling yields are indicating economic weakness rising stocks are indicating economic strength that really for a minute the market perspective it didn't make any sense if you're looking at the u.s. bond market all by itself you're an American investor or whatever and you're looking at bond yields all by themselves and saying why in the world would I want to put money into a ten-year Treasury that's yielding 250 right now it's yielding actually 230 believe it or not why in the world these are historically low levels there's no reason to do it you and you'd be absolutely right if the US was the only country in the world but if you look overseas it makes a lot more sense while we are by the way these yields have since come down yesterday this hit a new low 2:30 and the German bund actually is down to 90 which is someone told me yesterday a 500-year low well you guys have more history than we do some 500 years that's pretty good anyway so I began writing about this several months guy says you know the reason that the u.s. bond yields are coming has really very little to do with the u.s. it has to do with Europe has to do with Japan just like stocks are highly correlated global stocks global bonds are highly correlated look at these two okay and yeah yeah the US yields are at historically low levels but if you have to if you have to make a choice between let's just stick with round numbers if you had to make a choice between buying a tenia german bunda 1% or a u.s. bond at 2.5% which would you take question go for the US you have a higher yield compared to Germany we're a high yielding country well like an emerging market you know Japan is 0.5% so compared to Japan these are two areas that are battling deflation as you aware although I haven't noticed that any deflation in London the last week everything's so expensive I'd hate to I'd hate to come here when you're having an inflation problem but anyway where was I with that everyone everyone around the world is battling deflation so the fact that yields are so much lower in Europe so much lower in Japan in fact recently the only country that whose yields were even comparable to ours are right here the UK and then they slipped a little bit below it's on UK rates is somewhere around the u.s. so they are considered the two strongest markets in the world at the moment well you wouldn't know it looking at the stock markets so there's a lot of deflation going on so the only way you can understand this decline in bond yields is to look at what's going on overseas and as long as the eurozone is fighting deflation as long as Japan's fighting deflation and Japan's in the middle of quantitative easing you guys are getting pretty close to it here it looks like it's highly unlikely these are gonna go up much it's just not likely so what's going on here he's acting as a drag on that so the whole point of that is simply you can't look at the US market in a vacuum and I'm always preaching this - in fact when I first started going into market work years and years ago it was not well-received by the Technical Community they did not think that this had any place in in an MTA conference or a won't blame if that you weren't even around then and if the conference now it's a it's considered the brands of technical analysis but it was so frustrating talking to an audience of American analysts they had no interest whatever and what was going on overseas 30 years ago no interest whatever now of course they follow it very fact when you turn on Bloomberg now or CNBC they follow the foreign markets just about as much as they follow and so I got I could do get a kick over coming over here and watching your local markets to see how much well obviously you cover your heart it's here very extensively I get a kick out of that anyway let's move on let's talk a little bit let's this is the the dollar although the focus is a lot have been on long term yields this is really really where the real interest is these are short this is a two-year yield in the u.s. I'm not quite sure why I put it in red but you notice that this has been moving up the dollar has been moving up I think this is really the reason that the dollar has been so strong this is the two year this is the one the bond yields are influenced by the inflation deflation foreign yields whatever this is more influenced by Fed policy in US and as you know the markets anticipate so this is anticipating higher yields in the US and the Fed being one of the first there's a race going on apparently between whether the UK or the US are gonna I don't think anybody wants to do it now but notice that three-year high and of course that's lending support to the dollar which is moving up meanwhile the German two-year yield is negative think I think most of the eurozone is actually negative at this point so you have US yields moving up you have German yields negative obviously this is a much better place to be and that's why the the dollar has been so strong and this has been so weak by the way over the last I'd know Larry Berman before me mentioned the Fed the other day and I want to get to current because I'm not sure what's going on at the moment but this just this last Thursday the Fed came out and everyone thinks the Fed is getting ready to move they came out with incredibly dovish statement in which they expressed concern about slow an economy they expressed concern that the rising dollar may act because we all want to see more inflation we have a little more than you do unfortunately or fortunately I should say they're concerned that the rising dollar may actually push US inflation back down again maybe even toward deflation they're also concerned that the rising dollar is going to have some negative effects so the dollar corrected a little bit and this pulled back a little bit I think it's down here somewhere so we're getting a little little retracement but anyway so these are these are things worth keeping an eye on and since we're speaking about currencies I want to come back to that just a little bit obviously when the dollar is going up most foreign currencies I can't think of any foreign currency that's going up at the moment but I might be wrong that certain come out a certain occurrences get hit harder than others so again let's continue this Minister oh let me let me go on with this the the brown bar is here that's the CRB index okay although but in the the Green Line that is the Australian dollar the red line is the Canadian dollar okay when the US dollar was going up obviously foreign currencies go down and commodity prices go down so currencies that are tied to countries that are natural resource producers tend to get a double whammy which is they're not only getting hit by a rising dollar they're also getting hit by falling commodity prices and two of the worst performers were these two the Aussie in fact this chart was done a month ago they're all down around here somewhere the CRB is testing it slows way down here and I think these two are down here as well so so that's another thing they call come out of I think the New Zealand currency is just hit a record low or something like that all all the even read this morning the Russian ruble is at an all-time low against the dollar but that's a lot of that's geopolitical but it also hurts Oren Bloomberg this morning that Russia's also been hurt by falling oil prices which are just collapsing so anything type the Brazil even Brazil is affected by any any currencies tied to come out of these are being hurt okay let's move on and keeping a close eye on the clock here because I want to leave a little time for Q&A at the end I think this is the last chart at least I hope it is I don't want to come back to this idea of the the wisdom tree ETF hedges out the negative effect of a falling yen David touched on this yesterday morning about the inverse correlation between Japanese stocks and the Japanese yen he plotted them so that they would go in the same direction I've shown them the way they actually are the green line there that is the Japanese yen as you can see and I'm going back here to the the end of 2012 when all the started when a banaba AB anomic s-- started to come into play when the new regime came in to Japan and they wanted to battle deflation you know Japan's been a deflation now for almost 20 years and part of the problem with that was the end the yen has been one of the strongest currencies in the world during that period and the way you battle deflation is to lower the currency so that was it and you can notice that from that point when the Euro when the yen started turning down Japanese market became the strongest it went from one of the weakest markets in the world to one of the strongest and then notice that again a combination of of into market with this forming a nice bullish triangle here and then about a month ago the end hit a six-year low and this thing broke out to the upside now we've retraced a little bit since then but at least you can see and it's amazing to me how these things happen they happen so coincidentally and also the fact that again one other little example of this is if you see a bullish pattern like this now you I think you would all recognize this as a triangle okay and you know a triangle is usually bullish when you're in an uptrend so if you've seen one side here that and you say this looks bullish to me and you know that this thing is inversely correlated that ought to make automatically makes you bearish on the end so very often you'll be looking at one market and you'll one mark one of the markets may not be telling you much I'm confused about that but the other one may be giving you a very clear pattern and that will tell you what the other one's gonna do so anyway now let's get back to wisdom tree as I mentioned now the the yen has lost about 30 during that's a lot oh that's a lot of yen thirty percent since the end of a 2012 and the chapter of the Japanese markets up about 70 percent I think during that period of time okay now if you were an American investor or maybe any investor and you would put money into this market if if you had put it into the nikah you would have done well if you would put it into the ewj which is another very popular ETF traded in the state's ewj japan i shares that is traded in dollars okay you would have made about 30 percent if you invested in this you would have made about sixty percent double because this this ETF hedges out the negative effect of the falling yen so you get in the benefit of rising stocks and you and your not getting hurt by the falling in this has become the most popular vehicle in the states for trading the Japanese market okay so there are two lessons there if you're gonna trade this got a look at this and make sure you head make sure you hedge this out and by the way the difference in performance between the two is purely the currency I mentioned that this the this is up over sixty percent the ewj was up a little about thirty percent the thirty percent difference between the two is accounted for by the thirty percent drop in the yen okay so that's just a little little something to keep in mind and we're almost we're doing pretty well I'm just about done picture of my three books on into market analysis notice they didn't put my picture on the last one not quite sure why that is but the reason I'm putting it up there is I've written three books and I don't think I'm gonna write anymore if they come too old to write another one but main thing is the headline there when I first started writing about him to market work I don't know thirty years ago it was very hard to implement a lot of these strategies because you just the vehicles weren't there now with ETF's I mean my god you can trade the US market you can trade big cap small caps you can trade sectors you can trade foreign shares trade fixed income currencies you can do it all it makes it very it has revolutionized into market trading I think it's one of the reasons that's become so popular because first of all the presents vtf make it extremely easy to track these things and maybe even more importantly it makes it extremely easy to implement them so you can very easy for me up with maybe 15 or 20 ETFs on our stock chart screen I can follow everything that's happening everywhere in the world so ETFs but there are you know as I mentioned with the currency thing there were certain things you got to know about the ETFs and then let me wrap it up with this last slide what into market analysis does and what it doesn't do first of all as you've noticed I think it bridges the gap between fundamental economic and technical analysis if I were giving a talk here to a roomful of economists I hope there were none here today I'm just kidding I don't think they would have any problem because I'm not talking about head and shoulders tops I did talk about triangle so but I'm not talking about head and shoulders tops I'm just talking about basic economics here and I'm just using the markets to point these things out I don't think an economist would have too much of a problem with that it also combines all global markets until we unified and coherent whole as I have tried to demonstrate just in a little way and also I think maybe more importantly of all it adds a new dimension or another layer to traditional technical analysis I have nothing against traditional technical analysis I still use it I didn't show it to you today because there just isn't time I still look at all the charts and all the indicators and all that kind of stuff I'm simply suggesting I don't think you can stop there I think there's more of this so if you're trading the US market you have to know what's going on with yields you have to know what's going on overseas you have to know what's going on with the URL you don't I'm saying it all it all fits together and that kind of stuff so even if you don't trade the other markets the other markets are offering you an enormous amount of information and once you want to stay on a few of the base of principles it's really not that difficult ok the trends are usually pretty easy to spot you just have to make sure that you see them and I think max how am i doing I think I actually have some time left over oh good so I have a question about European and the performance as you you didn't show a long-term chart but I'm sure you are aware that we are at an all-time low of four european stocks versus US stocks if you express everything in the same currency do you think we are going to break out of what usually was a range or do you stick to mean reversing properties that we usually but that have been enforced over the previous 20 years I think I got part of that I if you want my views on the markets I could have shown you a lot more charts but I didn't I chose not to do that I do think that the European markets are leading the rest of the world lower at the moment the eurozone in particular is quite weak I mentioned the there's an etf easy.you which is the knee TF of the what is it 15 or 18 EMU countries that's trading at a 12 month low I happen to look at and I mentioned the German I happened to look at the German market yesterday and it looks like it's testing a neckline the head and shoulders top they would go technical looks like that's getting ready to break down I think the footsie which is the strongest market in Europe but just hit a 52-week low I think so it looks to me like the European markets I think this is a correction basically to be honest with you I still as I said I still I think stocks are going to do lot better than bonds in the next but we have a deflationary problem going on one thing I find a little interesting maybe ironic and I'm not sure this is answering your question but I understand that the the eurozone the ECB is trying very hard to fight deflation I understand that and the way to fight deflation is to lower your currency but by weakening the the euro they have strengthening the dollar and by strengthening the dollar they have weaken commodities and the fallen commodities are increasing global deflation you get that yeah commodities are plunging the price of oil is plunging crudo brent is at a two-year low the main reason for that is because the dollar is rising and the main reason the dollar is rising is because the euro was fallen the euro has 57 percent of the dollar index so in a way by lowering the euro the ECB is contributing to global deflation I just find that an interesting thing so it looks like and that would the dollar so strong they're beginning to worry about maybe some deflation in our country so we maybe fake a deflation I thought we had come out of this I thought the deflation scare was the last decade and we had come out of it and it looks like we're we're right back into it again deflation is a lot worse than inflation because there comes a point where the central bank's can't do anything so we're gonna have to ride this out it's going to keep interest rates lower for a longer period of time which may in the long term help stocks but at the last the last the last statement I wrote the last article I wrote last week we were looking at the US markets which were all coming down and testing 200-day moving averages and there was a big debate is this just a pullback or the start of a correction I kind of leaned toward the latter but I said ultimately it's going to be determined by what happens in Europe if the European markets can pull out of their tailspin then we'll probably be okay if they don't and they keep going lower then we're gonna probably go lower as well one final story and I think we'll the last time I was in Europe was January 2008 I gave a speech in Switzerland Zurich I think it was and we were just beginning to go into a tailspin in the States the previous three months and I kept reading about how Europe was immune from this because they had decoupled which is a word I hate and I gave a speech a very depressing speech and I said I'm sorry but there's no such thing as global decoupling and I said if we're going down you're going down with us and now I he read just the opposite I've been hearing over the last week or so that Europe's got problems but the US has decoupled from Europe so it's just the opposite so I said well if Europe's going down we're going down with you're maybe not as far but anyway I think they were all interrelated I'm not sure that answered your question but I gave it a shot John going with that theme and you're stating that we think for the US markets our new secular bull market if the European markets pull the US markets down does it seem reasonable that we could retest the breakout from spring of 13 actually interesting the first slide I showed was the fact if I understood your question how far down we go on that break out of the first chart we showed the S&P 500 breaking out last spring to an all-time high normally if we get it it should stay above that so that pre the 2000 2007 highs should be the new the new support level we could pull back 20% from here and still be at that support level in fact I wrote that earlier in the year I thought we were going to get a bigger correction sooner and I said we could go down 10 15 20 percent and it wouldn't affect the long-term uptrend if we go more than 20 percent then I'll have to rethink it but I don't think that's going to happen so we haven't had a 10 percent cut I'm talking more about the states but that's where I spent most of my time we haven't had a 10% correction in three years at the very least we do for that maybe 10 15 percent and if the dollar stays strong I don't think we'll correct as much as you because we'll do better but I think we will correct I'm thinking maybe 10 15 percent and I think that'll create a good buying opportunity I think that'll create a good buying opportunity because I think we're still in a secular bull market and we're in a period of seasonal weakness right now October as you know most bottoms are formed during October where we're also in a midterm election year which is generally very good for the markets so I'm hoping for a deeper correction here a better buying opportunity and I think things may start to get better from there but a lot will depend on what happens here in Europe I'll have two questions is that all right well the first one is I noticed the inter market relationship has been changing for some markets as with the case of Japanese year and Japanese Aki market as you pointed out has been possibly correlated over the past 10 years but not necessarily the case before say 10 years that's before 2005 and also notice like a paradigm shift change interval relationship between the US bound and the u.s. active market since the global financial crisis my question is are there any other say inter market within such relationship changes over the past few years that really stands out to you I'm a second question it's all I thought that was that was a second okay can I take those let me try those if I understood what you said the the relationship between the yen and and Nika that actually goes back quite a ways since 1988 1990 well you know Japan peaked in 1990 during that this period of deflation when the Japan was the weakest market in the world the Japanese yen was actually one of the strongest currencies in the world so nothing has changed here the fact that the the yen is coming down the inverse it does come and go but it does hold up over time it's a very export oriented country the other thing about the changing your right the relationships between bonds and stocks have changed that's one of the reasons I wrote one of my books I wrote in a deflationary environment bonds and stocks generally move in opposite directions now we haven't seen that the last few years but I think that's mainly because of the Fed we're not in normal if we if we were in a normal environment right now I think yields would be higher okay but the Fed as you know has kept rates we don't have a normal bond market at this particular point and the reason just at this point when the Fed is basically leaving the field our rates should be going up the rest of the world is just going into quantitative easing so that's keeping yields low I think that's very artificial and I think but you're right the relationship has changed but I think we know why but I think I hope at some point in the future we'll get back to a more normal environment and I think that I think I answered that I think we all know that when the US sneezes and the rest of the world often gets a cold and down in Australia we normally get the flu and the other thing is I know my mistakes I'm making and trading now I've got to get rid of that pink trendline I'll make it thank you very much [Applause] [Music]

Channel: Society of Technical Analysts (STA)

Views: 17,014

Rating: 4.9694657 out of 5

Keywords: technical analysis

Id: rvo1M1fqIuE

Length: 53min 17sec (3197 seconds)

Published: Thu Nov 01 2018