While all eyes are on Russia's next move, my eyes are focused
farther east, to Japan.
Much has been made in the media about the sanctions the U.S. is
placing on Russia and many smart people are scrambling to figure
out how these events will affect exports, imports, prices, and
ultimately financial markets around the world.
The situation with Russia no doubt is very serious, but when it
comes to the financial markets there is still just one major
driver; the Yen.
Causation or Correlation?
When discussing correlations, even extreme ones, there is always
a question of which particular data point is driving which.
Essentially, it can be a chicken and egg scenario where an investor
is not sure whether A is causing B or B is causing A.
Sometimes it doesn't matter as long as the trend and its
implications can be recognized. After all, do we really need
to know how the car engine works to drive home?
Check out the chart below of the Japanese Yen (NYSEARCA:FXY)
shown in blue with the U.S. Stock Market shown in black
There are a few things happening on the chart that merit
1) Generally both markets trend
together. This is shown by the overwhelmingly positive
correlation in the bottom portion of the chart
2) That correlation has often approached 1.0,
showing an incredibly strong relationship between the Yen's
weakness and the S&P 500's strengthening. It also
suggests the S&P's fate is likely tied to the Yen's, or vice
3) Whenever the Yen (in blue) has fallen in
price (strengthened in value) the S&P was not far behind it in
declining in value. This is shown by the red squares.
Every meaningful S&P top of the last year was preceded or
coincided with a bottom in Yen weakness
The Gorilla in the Room
The New York Stock Exchange has traded about $40 billion worth
of stock each day on average so far in 2014. The Nasdaq
(NASDAQGS:NDAQ) market has also been trading around $70 billion a
day. Together these two exchanges make up the bulk of the
U.S. equity markets (NYSEARCA:SCHB) and trade around $110 billion
worth of equity each day.
In contrast, according to the Bank of International Settlements,
the foreign exchange markets trade over $5.3 trillion each day
(NYBOT:DX-Y.NB). Of that $5.3 trillion, the Yen
(NYSEARCA:YCL) accounts for an estimated 11.5% of the total amount
resulting in around $600 billion of Yen traded daily.
The Yen trades over five times the amount of U.S. equities and
puts in perspective just how massive the foreign exchange markets
are compared to the equity markets.
Given the size of the Yen and foreign currency markets, it is
highly likely the Yen is the gorilla in the room and a much larger
factor in the equity markets than is given credit by the mainstream
media and analysts.
Will the Volker Rule take down Financial Stocks
In addition to being the Goliath to the equity market's David -
based on pure dollars traded - a look at the chart shows that the
Yen also leads the equity markets, often topping a few days before
the equity markets. Every time the Yen has started to
strengthen the equity markets have followed it lower.
What this means is if you are bullish the U.S. equity markets,
then you must also be bearish the Yen and most certainly expect
more weakening in that currency. Otherwise, history does not
support a continued rise in the equity markets.
If the Yen continues its recent strengthening trend, it is
likely the U.S. equity markets have again found another top.
Profit Strategy Newsletter
keeps you ahead of the macro trends in all the asset classes.
Check out our bi-weekly Technical Forecast and why we think the
next move for the Yen is likely to be continued strength.
This implies the S&P has again likely reached a tradable
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