Four sectors of the financial market


An exception may be only in 1999, when there was virtually simultaneous turn gold and commodity prices, but keep in mind that the fall of gold in 1998 was suspended, which was the first sign of his turn.

But in 1999 came to the forefront non-market factors, in May, following a statement by the Bank of England put up for sale for more than half of its reserves, the price of gold fell sharply, and then in September, after the European banks limit their sales, as abruptly regained its position. These market developments have led to the yellow metal distortion relationship between the dollar and commodity markets in the period 1998-2000., When there was no reason to have a clear schedule for the U.S. dollar.

Now there is a simultaneous increase in the gold market and the product market. First signal of the end of growth in commodity prices will be the formation of the top in the gold market. Thus, the U.S. dollar, which is closely associated with the gold market has an impact on the commodity market. And that, in turn, is connected through inflation from debt and equity markets. Now, to close the chain of mutual influences of the four sectors of the financial market, it is necessary to determine what influence the dollar.

The figure shows the graph of the U.S. dollar index and the schedule of 100 minus the extended futures on the euro / dollar, which reflects the market's expectations for the 3-month interest rate on the dollar. These graphs show that in 1998 coincided base in both markets. Important peak in the graph 3-month interest rate in 2000 ahead of the peak of the dollar in 2001 to 14 months. The present growth since June 2003, the 3-month interest rate helps strengthen the dollar. Thus, the relationship of the four main market sectors of the economy can be represented schematically as shown in the figure.

Where not to invest money

In a previous publication was a diagram of the interaction of the three sectors of the financial markets (bonds, stocks, and commodities) in the framework of a typical business cycle. We can now include the reversal of the fourth sector - market dollar and gold. Please keep in mind that this is an idealized diagram.

But this scheme explains what needs to happen in the markets, pointing to certain expectations. Therefore, its practical value is definitely more attractive sectors of the financial market, given the current stage of the economic cycle. We have previously determined that the U.S. economic cycle is in the third stage. This step corresponds to the simultaneous increase in bonds, stocks and commodities. However, as the pace of U.S. economic growth in the bond market will change in the trend. It is now formed a local maximum in the market, which could be an important summit and signaled the coming of the fourth stage. At the beginning of the economic recovery as an effective means of early protection against inflation can serve gold and related assets (such as gold stocks) as well as the goods themselves and share the commodity sector (Basic Materials). Unlike stocks in general, investments in bonds in the current period are not effective. Conversely, effective can be the sale of bonds (bond futures) or shares that are sensitive to interest rates (for example, shares of banks and savings and loan companies).

The sharp decline in interest rates in 2001 put pressure on the dollar and at the same time supporting the gold. This situation will last as long as the increase in interest rates will fall and bonds. True, this does not mean there is no possibility of long periods of adjustment of the dollar against major currencies. The proposed series of articles on the basis of intermarket technical analysis examined the relationship between the main sectors of the financial market: stocks, bonds, commodities and currencies. Such an analysis is necessary in the choice of investment objects. At least he can show where you do not need to invest money. After identifying promising sectors of the next stage of intermarket analysis is to determine the moment of entry into these sectors. Here comes into play the classic and computer technical analysis. For example, in the first part of this article indicates a probable reversal of the upward trend in the bond market.

An additional signal that possibility became bearish divergence indicator RSI, and confirmation of the bearish break the uptrend line.

The construction of graphs used technical analysis package of CQG.