Tuesday, March 06, 2007

Japanese Yen: Follow The Leader

As a stock trader it's important to recognize what is moving or leading our stock market. Last week our stock market experienced a rather sharp sell off. The Shanghai index fell 9% and the next morning our market followed. One would assume that the Shanghai index was the catalyst for our sell off and maybe it was to some degree, but I feel our stock market is selling off because of what is going on with the Japanese Yen.

Above is a daily chart of the SPY, Shanghai index and the Japanese Yen. The Shanghai index made only a 2 week low last week, yet our market made a 3 month low. Why would that be? Why is our market getting hit harder than the Shanghai index? The answer in my opinion is the Japanese Yen.

Look at the move the Japanese Yen has had over the past two weeks and then look at the move our market has had over the same time period. Which market do you think is impacting our stock market more, the yen or the Shanghai index? I would say the Yen is what is behind our sell off. As the Yen rises our market sells off. Notice today our market was up.. any idea why? Look at the yen...the yen sold off so we rallied.

In my opinion the Yen has put in an important bottom on the weekly chart. If the yen continues to rally like I think it will, our market will be under pressure as the carry trade unwinds.

A few days ago I posted a chart which shows how the Yen leads our market by about 20 days. According to that chart, our market should continue to move lower.


jim r said...


excellent analysis. what price levels are you seeing as targets for theyen? any insight into time period involved to get there?

Randal said...

very interesting. im also keeping an eye on the sub-prime credit/lending sham...err i mean sector. it seems the chickens are coming home to roost, but im still not sure if they are done manipulating things higher just yet.

Kevin said...

I don't have any time targets because the trend has been down so it's hard to measure how long rallies will last.

I don't have any price targets as of yet.


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