Impact Reports and Market Correlations

Markets typically bounce around in consolidation patterns. Trend type moves occur about 25% of the time. Consolidation phases precede trends, and trends follow consolidation phases. Traders labor to catch trends and avoid the trendless choppy trading periods. It requires timing and agility to be profitable when a market is gyrating and not trending.

There are markets that correlate either directly or inversely. Occasionally a breakout or onset of a trend is revealed, while the other correlating commodity remains stagnant. Recognizing subtle differences often leads to the edge we all seek to catch a trend when it kicks in.

This week was jammed with impact reports. The Federal Open Market Committee (FOMC) and European Central Bank (ECB) decisions on interest rates were pending. Plus, we had to address inflation data.

When these data are released, there are immediate reactions that divulge correlations. Fed Chairman Jerome Powell exposed a more hawkish or aggressive stance on hiking interest rates. There were immediate reactions: Stocks dropped, precious metals rose, and interest rate futures fell.

We learned that stocks are not sensitive to inflation, unless it is accelerating at a rate that surpasses the Fed’s expectations. Inflation is a good thing, so long as it is gradual. Thus, stocks should see steady to higher prices over the next quarter.

Interest rate futures and the ETFs that track interest rates (TLT and IEI) should be steady or soft under these circumstances.

Precious metals have rallied during recent events. This sector seems to be the go-to investment when confusion reigns. Plus, gold is traditionally an inflation hedge. Give me conflict and inflation, I’ll take gold.

When vital data are released, watch the reaction in the major sectors: interest rate, stock index, precious metal, energy and currency. The knee-jerk reaction will often reveal the relationship between these commodities.

John Seguin, Market Taker Mentoring

Trader Education