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Chapter 28, Part IV. Stock Market - Forex Relation

Discussion in 'Complete Trading Education- Forex Military School' started by Administrator, Mar 8, 2012.

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  1. Administrator

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    Part IV. Stock Market – Forex Relation. [​IMG]

    Commander in Pips: If you remember, we’ve said that this is just a theory of strong relation between the Forex market and the stock market. It sounds logical, but does it really hold? Take a look at the first chart:


    Chart #1 | S&P 500 and Dollar Index Monthly
    [​IMG]

    Although we see that this theory works well till 2000, when the “Internet bubble” has blown up - nowadays this theory works poorly. The dollar has been in a downtrend since 2001-2002 and has shown just some retracement in 2004-2005, while the stock market was in a solid uptrend right from 2002 till 2007 and created new highs. Then we clearly can see risk aversion – one of the reasons why this theory does not work well for USD, JPY and CHF. Later we see the same story – the Dollar stands in wide range, while the stock market is rallying higher. So, we might say that for US, this relation is weak. It’s very difficult to use it in practice.

    Pipruit: Hm, and what is your opinion, why it happens like that?

    Commander in Pips: There are a lot of reasons this could be, but I share with you just with single assumption. This is just guesswork, and an idea, ok? I dare to suggest the reason is in the money supply in US, they even stopped releasing data on M3 in 2006 – that is a warning sign. The balance of the US quite different in 90s and 2011 – Budget deficit and balance have changed drastically. Money supply has increased in multiple times. As a result, I suppose that there are so many dollars that they are sufficient to satisfy investors’ demand and at the same time do not show any growth of USD. Other words – demand for USD from stock investors is insignificant in terms of the overall USD Money supply. There are just too many dollars in circulation.
     
    #1 Administrator, Mar 8, 2012
    Lasted edited by : Oct 8, 2016
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