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Thread: Dont Get Fooled! Be prepared, this is economics

  1. #11
    Dollar and Commodities
    While the Dollar and currency markets are part of intermarket analysis, the Dollar is a bit of a wild card. So far as stocks are concerned, a Dollar is not bearish unless accompanied by a severe progress in commodity prices. Obviously, a big advance in commodities could be bearish for bonds. By extension, a Dollar is also generally bearish for bonds. A Dollar behaves an economic stimulation. Multinational stocks which derive a large part of their revenue are benefited by this.

    What are the ramifiions of a rising Dollar? A nations currency is a reflection of its economy and federal balance sheet. Nations with balance sheets and economies have more powerful currencies. Countries with debt burdens and economies are subject to weaker currencies. A rising Dollar puts downward pressure on commodity prices since most commodities are priced in Dollars, such as oil. Bonds benefit from a decrease in commodity prices since this reduces inflationary pressures. Stocks may benefit from a decrease in commodity prices since this reduces the prices for raw materials.


    Industrial Metals and Bonds
    Not many commodities are made equal. In particular, oil is more likely to supply consequences. Unrest in oil producing nations or areas generally causes oil prices to spike. A price rise is unfavorable for stocks, but a price rise due to increasing demand can be favorable for stocks. This is also true for compounds, which are less vulnerable to those supply shocks. Consequently, chartists can observe industrial metals prices to get clues on the economy and the stock market. Growing prices reflect demand and a healthy economy. Falling prices reflect demand and a weak economy.

    Industrial stocks and bonds rise for different reasons. Metals proceed when the economy is when inflationary pressures are building. When the economy is weak and/or deflationary pressures are 17, bonds decrease under these circumstances and rise. Further insights can be provided by A percentage of the two into economic strength/weakness or inflation/deflation. The proportion of metal prices to bond prices increases when economic strength and inflation are widespread. This ratio will decrease when the economic exhaustion and deflation are dominant.

  2. #12
    The Business Cycle
    The chart below shows the idealized small business cycle and the intermarket relationships through a standard inflationary environment. This cycle map relies on one shown in the Intermarket Review by Martin J. Pring (http://www.pring.com/). The company cycle is shown as a sine wave. The first three stages are a part of an economic contraction (weakening, bottoming, strengthening). Stage 3 shows the market in a contraction period, but strengthening following a bottom. Since the sine wave crosses the centerline, the market moves from contraction to the three stages of economic growth (strengthening, topping and weakening). Stage 6 shows that the market in an expansion stage, but weakening following a top.

    Stage 1 shows the market contracting and bonds turning up as interest rates decrease. Economic weakness favors loose monetary policy and the lowering of interest rates, which can be bullish for bonds. Stage 2 marks a bottom in the market and the stock market. Though economic conditions have stopped tripping, the market is still growing. But, an expansion stage is anticipated by stocks prior to the contraction interval ends by bottoming. Stage 3 shows that a huge improvement in economic conditions as the business cycle prepares to move to an expansion stage. Stocks have been rising and commodities today anticipate an expansion phase. Stage 4 marks an interval of expansion. Both stocks and commodities are rising, but bonds turn lower because the growth increases inflationary pressures. Interest rates start moving higher to combat inflationary pressures. Stage 5 marks a peak in economic growth and the stock market. Though the growth goes on, the market grows at a slower rate because rising interest rates and rising commodity prices take their toll. Before the growth actually ends, by peaking stocks anticipate a contraction stage. Commodities stay powerful and peak following stocks. Since the company cycle prepares to move from an expansion stage to a contraction stage stage 6 marks a deterioration. Stocks have been moving lower and commodities now turn lower in anticipation of diminished demand from the worsening market. Keep in mind that this is the small business cycle in an inflationary environment. Stocks and bonds progress in stages 3 and 2. Likewise, both decrease in stages 5 and 6. This would not be true at a deflationary environment, when stocks and bonds could proceed in opposite directions.


    Sector Rotation
    Unsurprisingly, the company cycle affects the rotation of stock market businesses and business groups. Sectors perform better during particular phases of the company cycle than many others. Knowing the stage of the company cycle can help investors position themselves at the sectors that are right and prevent the wrong businesses.



    The chart above shows the economic cycle in green, the stock market cycle in red and the best performing sectors on top. The green economic cycle corresponds to the business cycle. The centerline marks the contraction/expansion threshold for its market. Notice the red market cycle leads the company cycle. The market ends up and crosses the centerline before the economic cycle turns. The market turns down and crosses below the centerline before this economic cycle.

    Cyclicals, which is just like the consumer discretionary sector, would be the first to turn upward in anticipation of a bottom in the market. Technology stocks aren't far behind. These two groups are the leaders at the beginning of a bull run in the stock market.

    The top of the market cycle is marked by comparative strength in materials and energy. These businesses gain from a rise in commodity prices and a growth in demand from an market that is expanding. The point for the market comes when direction shifts in energy. This is a indiion that commodity prices are currently starting to hurt the market.

    The market peak and downturn are followed by a contraction in the market. At this stage, the Fed starts to reduce interest rates and the yield curve steepens. Falling interest rates advantage debt-laden utilities and company at banks. The yield curve improves profitability at banks and encourages lending. Low interest rates and effortless money eventually result in a market bottom and the cycle repeats itself.

  3. #13
    How The Economic Machine Works
    This video shows the basic driving forces behind the economy, and explains why economic cycles happen by breaking down theories like credit, interest rates, leveraging and deleveraging.


  4. #14
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