One of the biggest mistakes for traders is to assign current equity market moves to whatever is leading the news cycle. You hear the irresponsible reports in the morning tying whatever nonsense is happening in Washington to whatever the market may be doing early in the session. Every 50 basis point move in the stock market is measured against the day’s headlines.
This is a disservice to investors and a big reason why too much news consumption can be poisonous. It has become customary for business journalists to attribute market moves to the top headlines they see, but it is important for traders, in a selfish endeavor to profit from the market, to look deeper.
What is happening in U.S. stocks is mostly a factor of what is happening in stocks as an asset class, and therefore what is taking place outside of the United States. Stocks markets have been in an uptrend throughout 2016 and 2017. One of the biggest reasons for being so bullish on stocks has been the behavior of markets around the world.
The FTSE 100, German DAX and Nikkei 225 are all showing long-term bullish trends. The FTSE has broken out of an 18-year base. As long as the FTSE is above the highs from 2000, it is very difficult to be bearish UK stocks, and therefore stocks as an asset class (see “Global bull market”).
The German DAX is breaking out above the highs from 2015. If the DAX remains above 11,800 it is very difficult to be bearish of German stocks, and therefore stocks as a group.
After a nice consolidation, all signs are pointing to an upside breakout in the Nikkei 225 above 25,000. This is not just a little bit higher, this is still a lot higher. If we are above 21,000 it is hard to be bearish Japanese stocks, and therefore stocks as an asset class.
It’s not just in the developed markets. The Emerging Markets exchange-traded fund (EEM) recently broke above a downtrend line from the 2007 highs (see “emerging trend”). If EEM is above 46 we have to err on the long side of this trend. If emerging markets are rallying, it is a solid environment for U.S. stocks.
So next time someone tells you that the Dow Jones Industrial Average is up because of some news report, please point them to what is happening globally. It is very clear that stocks move together all over the world. While a U.S. election may be one factor and earnings might be another, these are just grains of sand in a massive beach. Therefore we focus on the only thing that actually pays: price.
