How International Markets Can Help Time Trading U.S. Markets

Below is a video by Peter Navarro which explains how he uses a select group of international exchange traded funds to better help him time trades in the domestic market, in particular, the S&P 500 (SPY). The three international indexes he follows include the FXI (following 25 large and liquid Chinese companies, sometimes called the Dow of China - betting that as China goes, so goes Asia), the IEV (following the S&P Europe 350 Index), and the ILF (following the S&P Latin America 40 Index).http://link.brightcove.com/services/player/bcpid1079049304?bctid=27461401001

While I have not back-tested these specific indexes for providing leading signals, the video does remind us of the benefits of looking at other data for helping one to spot trends and even forecast movements in domestic indexes. A number of years ago I was engaged in some research that was looking to see if the S&P 500 could be used to help predict trends in various international indexes. After all, the feeling was that as the U.S. goes, so goes the rest of the world - or so we assumed. As our research progressed, and we began doing correlation studies, principle component analysis, information-based data mining, and everything else we could throw at the problem, it became clear that in many instances we had it backwards. The international indexes were more predictive in helping forecast the U.S. market. While some of these correlations broke down over time, it nonetheless helped send the message that we could not assume that the U.S. markets were always driving the world markets, or that the influence was always consistent, in either size or direction. While this is more clear today, and less of a surprise, it still seems as though few traders and investors use such information. The three international ETFs mentioned above are a good place to start your own studies.

And Europe Isn't Immune Either

Also from FT.com:

Eurozone growth contracted at its fastest ever rate at the end of last year, with an unexpectedly-bad German performance deepening the recession more than had been feared.

Gross domestic product in the 16-country region slumped by 1.5 per cent in the final quarter of last year – the same pace of contraction as in the UK but faster than the 1 per cent fall reported in the US.

The turnaround in fortunes is particularly dramatic because economic instability had become rare in continental Europe. Until last year the eurozone had never reported a quarterly contraction in GDP growth.

Read the full story here.

Decoupling Debunked!

This post shows the various stock market indexes from around the world. Each continent of the earth is represented. This is just a sampling. I could have posted the stock market charts for Russia, China, India, Brazil, Canada, UK, France, Germany, South Africa, the United States, or just about any other country around the world. They would all look about the same. I have removed the symbols for the charts. See if you can guess what country's stock market index they represent. It wouldn't really matter much, because they all look about the same.

The point of these charts is simply to make the point that regardless of which stock market is chosen, they are so similar that it wouldn't matter which stock market index a trader chooses to trade, the results would be the same.

Decoupling is bunk, pure and simple!

Global Stock Markets Plunge!

I was under the mistaken impression that the stock futures exchanges were to be closed today. I wish I had been trading, and shorted the stock indexes!

Here are headlines from financial websites around the world. Stock markets in Europe have fallen an average of about 7% in just one day. Yes, these headlines are for real. Your are not dreaming, and this is no joke or hoax!

Financial Freefall: Global Market Carnage Spreads to Canada, LatAm

U.S. Stock Futures Flash Red

Stock Markets Plunge Worldwide!

Stocks Plummet in Germany, Hong Kong, and India in Global Rout!

European, Asia Stocks Tumble on Recession Fears

Panic Sparks Plunge in Global Markets

Will we see Wall Street run red tomorrow? It will certainly be an interesting day!

Foreign vs. domestic stock ETFs

TIP: To view these charts in better detail, you may want to open them in another window. The above charts were saved in a single jpg file.

Note that in the above three charts, representing some of the most liquid and commonly-traded International stock ETF's, the chart patterns are nearly identical. If I didn't label them on my charts, I could hardly tell the difference. These charts are of very diverse areas of the world: Emerging markets, Europe, Australasia, China. If I posted the U.S. stock ETF charts (SPY, DIA, QQQ, UWM, etc.), they would appear nearly identical.

The point of this post is simply that trading a multiplicity of stock ETFs from around the world is really quite useless, because all appear similar and move nearly in lockstep with each other. Stocks around the world tend to trade in very mirror-like patterns, with relatively small differences. I have noticed this pattern perpetuate itself time and again, and I finally realized that trading stocks, whether in Japan, Germany, Hong Kong, or New York, is still still trading stocks.

I suggest trading the largest and most liquid stock index ETFs, so you can enter and exit positions with good fills, tight spreads, and minimal slippage. Whether those ETFs are U.S., European, or Asian ones is largely irrelevant. However, U.S. financial markets are among -- if not THE -- most liquid in the world, so I prefer to use them. If I were living in another part of the world, I might trade using their indexes. However, this would only be because of the time zone and the need to trade at an hour when those markets have the greatest liquidity.

One caveat: I trade ONLY ETF's -- no individual stocks -- and they are all based upon indexes for those parts of the world.