One week Europe is a mess, the next week Europe's problems are
solved. And because of the hurricane damage in the
Northeast along with the U.S. Presidential election, Europe
has take a temporary back seat in the news. Does this mean it
is no longer important to our financial markets?
In an
article
I wrote on 10/3, the importance of the Euro and how its movements
are driving US stock prices, not earnings or other factors,
was captured by one simple chart. That updated chart is
below.
The chart also shows the more things change, the more they stay
the same. The Euro's tracking ETF (NYSEARCA:FXE) continues to
be highly correlated and the primary driver of the US stock
market's direction.
The Tail that Wags the Dog?
We live in a continuously more interconnected and global
world. Proof is shown by the immense size of foreign
transactions with over $4 Trillion traded on the currency markets
every day.
By comparison, the New York Stock Exchange (
NYX
), the largest stock exchange in the world, trades just $150B
each day, roughly. That market is 3x larger than its nearest
competitor, Nasdaq (NASDAQGS:NDAQ). The top 10 stock
exchanges in the world trade an estimated $375B collectively each
day.
This means the Foreign Exchange market is over 26x larger than
the NYSE and over 12x larger than all the world's major stock
exchanges put together. To call the Forex market the much
bigger brother of the equity markets is indeed an
understatement. Given the correlations and size differences
between the two markets, it is very safe to say that the currency
market is the dog that wags the tail of equities.
Where is the Euro (and thus the Equity Markets)
Headed?
We have been long-term bearish on the Euro. In our January
Newsletter, published 12/16/11 and when the Euro was trading around
$1.31, we stated, "As long as the euro remains below its ascending
trend line, we expect prices to fall further. A rally back towards
the trend line (then at $1.3250) would likely be another
opportunity to reload short positions." That indeed occurred
when the Euro rallied in the spring to its trend line before
falling another 10% to its July low of $1.21.
More recently, in our November ETF Profit Strategy Newsletter
published 10/19/12, we advised our subscribers, "The Currency
Shares Euro Trust (NYSEARCA:FXE) broke to a near term high of
$130.50 in September and double-topped this week. The
$131-$132 range is an area of stiff upward resistance". We
also identified a level where the Euro can be shorted again.
Price is now very close to confirming thatshort.
If the Euro's downtrend is confirmed, wealso expect the equity
markets to keep up their high correlations with the Euro, continue
to be the Tail of the Euro dog, and sell off alongside. The
implications also would affect other markets such as the Dow Jones
Industrial Average (NYSEArca: DIA), long term bonds (NYSEArca:
TLT), and commodities such as Silver (NYSEArca: SLV) and Gold
(NYSEARCA:GLD).
The
ETF
Profit Strategy Newsletter
filters through the unhelpful media noise by utilizing
comprehensive technical and fundamental analysis to keep us on the
right side of the markets. A few times each week we update
our subscribers on actionable high probability trading setups that
identify stops and profit targets like those of the Euro and its
tradable
ETFs
.
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