As the stock market continues to increase its volatility with highs and lows, investors must constantly be on the lookout for ways to assess the right direction in which markets are heading. Fortunately, there are certain relationships that can be used to evaluate market direction. Here are three key relationships to help assess market direction.
Firstly, there is the relationship between foreign equity markets and their domestic equivalents. Markets closely monitor global trends and constantly adjust to make sure that they remain competitive in a global sense. The correlation between foreign and domestic equity markets helps investors decide which direction the trends are heading in. By seeing how domestic markets react to international ones, investors can gain a better sense of the markets’ directions.
Secondly, the relationship between the U.S. Dollar, and commodities such as oil and gold provide another key factor to assess market direction. The dollar’s strength or weakness impacts the prices of these commodities. An effect which in turn has a direct effect on a country’s economic health. Hence, investors should always be attentive to the price movements of these key commodities to decide on market direction.
Thirdly, the relationship between stocks and bonds provides a powerful tool to evaluate market direction. This relationship is commonly known as “the yield curve”. Generally, when bonds yield higher than stocks their correlation tend to be negative and when stocks yield higher than bonds their correlation tend to be positive. By understanding the yield curve, investors have a greater awareness of the strength of the domestic markets and can decide on the best direction for investments.
In conclusion, by taking the time to analyze the three key relationships discussed above, investors can better assess market direction. With volatile markets, understanding the different relationships between commodities, the US Dollar, stocks and bonds can help investors gain clarity and make informed investment decisions.