Monday, July 23, 2007

No Market Is An Island

Over the last few weeks EZA (South African iShares) has been moving higher and today they closed above the year high.

What I like about trading this ETF is its exposure to Gold. Gold as a catalyst for equities is not something that occurs in our U.S. markets and this is why EWZ has less of a correlation to the S&P500 than other world markets.

Above we have a daily chart of EZA, in the middle is a chart of Gold and below that is a ratio chart of EZA compared to the S&P500.. Notice how EZA and Gold trend together. About 30% of the fund is allocated in the materials sector, which includes platinum and gold mining firms in South Africa.

What I find interesting about this relationship is that when gold trends higher, EZA tends to not only rally but actually outperform the S&P500. When the red line (ratio line) is rising, it means EZA is outperforming the S&P. Notice how the bottoms in gold coincide with bottoms in EZA.

On the other hand, when Gold is moving lower, EZA tends to under perform the S&P500 as can be seen in the falling ratio line.

In addition to gold the South African Rand can also influence EZA's performance. If you look at the chart below you'll notice the obvious correlation between the two markets. Notice today EZA has broken out to new highs and so did the South African Rand.

The point of this post is to show how markets are related and how trends in one market can affect trends in other markets. No market is an island.

1 comment:

Robert said...

Excellent post as always.

Will be watching EZA during the current action with the PMs as well as the correlation with the Rand.

Keep up the GREAT work.


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