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Chapter 28 Part III. Continuation - Stock Market. Page 3

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 27, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

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    Currency will appreciate in that country in which the stock market is stronger. It looks obvious that you should buy a stronger currency and sell the weaker one. Here I see just one problem. The point is that stock markets are highly correlated around the world. This is very rare due total globalization that some economy raises while all others fall, and could happen mostly due extraordinary events – such catastrophes as in Japan in 2011, wars, political turmoil or something like that. If there is a divergence among world major indexes – this could be an early warning about shifting a tendency on the world economy from growth to recession or vice versa. Take a look at S&P500 index and Nikkei 225 for last decade – they are highly correlated except last year due to the Tsunami and water flow in Japan.

    Besides, in general we might say that except for the US, Switzerland and Japan for recent 2-3 years this principle does not hold, precisely speaking holds conversely – when their equity markets perform terribly, investors do not sell USD, JPY and CHF for their domestic currencies, but vice versa – hold it. This happens because these currencies (CHF, USD and JPY) are treated as safe-havens due to reasons that we’ve already discussed – USD is the world reserve currency, CHF is 25% backed by gold and JPY is backed by huge reserves in USD:


    Chart #1 | S&P 500 and Nikkei 225 Stock indexes, monthly

    [​IMG]

    Pipruit: Still, I see here a divergence – Nikkei does not show second top, while S&P 500 does. The same we can see in collapse of 1987, although divergence there is smaller. Also I see huge divergence between tops of 2000 and 2007 – Nikkei has not formed them…​
     
    #1 Sive Morten, Dec 27, 2013
    Lasted edited by : Oct 8, 2016
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