Stocks May Be Ready to Rebound, Currencies Show
NEW YORK ( TheStreet) -- In my years of trading, I have always found it interesting how different asset classes relate to one another.
But it's better knowing how to use these relationships to gauge market sentiment and direction. I know a lot of people are wondering when the bloodshed in the S&P 500 Index might subside. Several things are giving us clues that the selling may be soon be over, at least temporarily.
There are several markets I like to monitor, but today I will focus on the Japanese yen and the euro. For those not familiar with the yen, it tends to be bought in times of market turmoil and uncertainty due to its perceived stability. The euro is useful in determining risk appetite and consumer sentiment. As a matter of fact, when I am intraday trading the S&P 500, the Dow or bonds, I will have an intraday chart of the euro up as well.
In my experience, there are no "always" relationships in the markets. In other words, various nuances and inter-market relationships do not always show a positive or negative correlation. However, I have found the euro to be an extremely good indicator in trading other markets.
One need only spend a few days watching the markets intraday to see how quite often the euro will tick up, and the S&P 500 follows suit. The euro ticks down, and the S&P 500 tags along. The correlation tends to be quite strong.
The Japanese yen, on the other hand, can be a great indicator as well, especially when it comes to volatility and uncertainty. Since 2008, I recall several instances of the yen jumping several hundred points or more as the S&P 500 got hit below the belt and risk assets were imploding before our eyes. Although I do not find the yen quite as useful intraday as the euro, I still monitor the yen, which gives me a "feel" for investor sentiment.
What I am seeing right now is a bullish divergence. The yen has come under enormous pressure in the past two sessions as the Japanese elections will be coming around sooner than expected. The expected winning party is discussing various measures including negative interest rates, thus putting pressure on the yen. That all makes a lot of sense.
However, even with such scenarios, the yen would likely strengthen if there was a 2008-like market meltdown in the works. Even if the yen did not strengthen, it is hard to imagine the currency falling over 300 ticks in two days if risk assets were really on the verge of a large-scale breakdown. Definitely something worth keeping an eye on.
That brings me to the euro, the red-headed stepchild of currencies. We all know the troubles this currency has seen in recent years. In addition, the eurozone still faces the monumental task of getting the debt crisis under control. The markets watch headlines regarding Greece on a daily basis. Spanish and Italian bond yields are monitored quite closely for spikes. Despite all of this, the euro has not imploded.