The Bond Market is a very misunderstood place. Usually all we hear are complaints. Fed this, Yellen that, something about her books being beige. I don't know. I can't keep up anymore. To me the Bond Market is place to find information that we can't get anywhere else. Even if you don't trade bonds, you must care about the direction of interest rates. But more importantly it's the intermarket implications of movements in rates that we're most concerned about. How is the next 3-6 month direction of interest rates and credit spreads going to affect stocks and commodities? WAs investors we're obviously interested in all of these things.
It's the end of the month so you know what that means: Brand new freshly completed monthly candlesticks for us to review. While I normally use weekly charts to get structural perspective on markets and then daily charts for tactical purposes, the monthly chart review is done at the end of each month to help identify the primary trends around the market. This is for us who want to avoid the day to day noise surrounding politics or the Fed or whatever news story is being sensationalized this week.
This is a global market environment. The S&P500 goes up and down based on the collective money flow from investors all over the world, not just within the borders of the United States. There are some people still fighting the civil war who simply don't understand this concept. US Stocks don't move up and down based on what is happening in America. What happens in the United States politically, economically, tax-wise, etc is just a tiny tiny piece of a humongous puzzle. This is a global market environment and the sooner you recognize that the bigger the advantage you will have over others who have not yet accepted this concept.
Even if you only trade US Stocks, or stocks local to where you live, understanding what is happening globally is essential to recognizing the direction of the underlying trend for the asset. And this trend identification is step 1 to market analysis. Today I went through every stock market index in the world to see if there is more good or more bad out there. Here are a few stand outs:
My weekly run through the S&P500 components is one of my favorite parts of the work week. I put on some music and go through all 1000+ charts. Remember we use the weekly charts to get structural perspective and then the daily timeframes to define more tactical opportunities: 2 charts for each of the 500 stocks. I then break down the index into 11 Sectors and run my analysis of stocks one sector at a time. This way it helps give me a better feel for that particular area within the entire stock market. To take it one step further, I then break down each of the 11 sector workbooks of charts into sub-sectors. So for example, in the "Energy Sector" there will be 4 sub-sectors: Integrateds, Services, Exploration/Production and Refiners.
Yesterday I kept a Diary throughout my entire process of reviewing the components of the S&P500. Many of you have written back with such nice things about that. I'm glad you enjoyed it. I think that in order to get the most out the research, it really helps to understand where I'm coming. This helps in the execution process, which is why we're here right? To make money in the market for ourselves and/or for our clients.
Today I felt that a nice supplement to yesterday's S&P500 work is a chart that shows what the S&P500 Equally weighted Index is doing relative to the S&P500 Market-cap weighted index. To me this is a good measure of whether or not we're seeing broad-based participation or if it's just the mega-cap names carrying the weight.
I get asked all the time about my process. A big question is usually around how did I find that chart in such a "random" country or asset, like an ETF on South Korea or a futures chart like Soybeans. To some people these might be assets that are not on their radar, but they are just as easy to trade as Apple shares or Crude Oil, that obviously get much more attention. My answer is simply that I look at all of them and just bring out some of my favorites. This is habit that I got into many years ago, so for me it's second nature.
