Japanese Yen Leads Stocks

Here's a chart you're probably not going to see anywhere else so let me explain what we are looking at. Above is an 18 month daily chart of the S&P. I chose to use the SPYs but I could have also used the SPX it really doesn't matter. The SPYs are in black. The red line you see represents the Japanese Yen inverted and offset 20 days into the future. So if you see the red line moving down like it is right now, that means the Yen is moving higher. I inverted the yen so that the two charts will be positively correlated and easier to see.

The point I'm trying to make with the above chart is that movement in the Yen leads
movement in the S&P by about 20 days. Look at the above chart carefully and you will see how nicely the two markets trade together. Keep in mind all of these trend changes were known 20 trading days in advance! So for example in early May 2005, you would have known from looking at this chat that the SPY should sell off and make a bottom in mid June. Most of the significant moves in the SPY were correctly forecasted by using the above chart except for December 2006 where the relationship temporarily diverged for just one month but then went right back on track.

So what is the above chart telling us now? Well according to the chart the S&P should continue moving lower at least until the end of this month if this relationship continues. At some point I can guarantee you this will relationship will fall apart, but the fact that everyone is focused on the yen carry trade right now, makes me feel confident that the yen will continue to lead our market. The Yen has been leading our market for the last 18 months so this is definitely something to keep an eye on. As the days unfold the above chart will give us further insight as to where the S&P might go next. I'll try to post this chart every week to keep all of you updated.