by Gregory Mannarino, TradersChoice.net
Is it possible to “see the future” when studying the stock market?
Understanding market dynamics and having an understanding of where capital is flowing within the markets at any given time are the keys to staying ahead of it.
Moreover, having the knowledge of where capital is moving within the market gives you a tremendous edge, which can allow you to make accurate predictions as to where the stock market will go.
As an example of how powerful having an understanding of market dynamics is, I would ask you to not just take my word for it but simply ask any of the many people who currently subscribe to my free newsletter, who will testify that since I started posting my own, specific trades in my newsletter, I have not had a single realized loss trading the market.
Before I reveal “the secret” to understanding where capital is flowing within the market, allow me to outline where traders and investors generally go wrong, as they are being deliberately distracted by the mainstream financial channels.
Turn on CNBC, Bloomberg, Fox Business, etc. at any time during business day/market hours. You will notice they constantly flash the Dow Jones Industrial Average across the screen. The Dow is based on just 30 companies, and, therefore, is an extremely poor/useless “indicator” of where stocks are actually going.
Moreover, if you were to look at any of the major indices – the S&P 500, NASDAQ, or Russell 2000 – where the mainstream financial channels constantly direct you, what information are you getting that will help you know if you should be putting any capital to work in the market?
The answer is simple: none!
For example, if the Dow were in the red, or lower, how would you know if the trend was going to continue lower… or perhaps rebound higher? Well, you can!
Years ago, I discussed a “fluidity of money” theory, which I will outline below.
My “Fluidity of Money” Theory
As mentioned previously, by watching the major market indices, you gain absolutely zero useful information that would allow you to know if you should either put money to work in the market or pull it out if you are already invested.
Cash “moves” within the market, and it flows in either two directions:
1. “Risk on” assets, such as stocks; or
2. “Risk off” assets, such as debt and the U.S. dollar.
As unusual as it may sound, debt and the dollar (which itself is a unit of debt) are considered “safe haven” assets to the market. The “flow” of capital within the market is dictated by the two factors of Fear and Greed. (For more on these, see my 30 June article, “WHEN MARKET FORCES COLLIDE.”)
My “Fluidity of Money” theory dictates that when Fear is in control of the markets, capital will move into debt and the dollar. When Greed is driving the market, capital will move into stocks. The beauty of this is just by observing two things, you can see which of these forces, Fear or Greed, is moving the market.
By watching the movement, either up or down, of the U.S. 10-year yield and the DXY (dollar index), you can see if Fear or Greed are driving the market. Anyone can observe both the U.S. 10-year yield and the DXY in real time. MarketWatch has a live feed and can be accessed from this link: https://www.marketwatch.com/ .
U.S. 10-Year Yield
Looking at the chart above, left side, you will notice the U.S. 10-year yield is 0.646 percent. In the event that Fear is in control of the market, you will see this number dropping.
Looking at the right side of the chart, if, again, Fear is controlling the market, the DXY would gain. When cash moves into the debt market, the 10-year yield drops; conversely, when cash is coming out of debt, the 10-year yield will gain. When cash moves either into or out of the debt market, it simply looks for a place to go. If cash is leaving the debt market, the 10-year yield moves higher, and it is a sure bet that this cash will be moving into stocks. If the 10-year yield is dropping, it is also a sure bet that cash is coming out of stocks and into debt.
Looking at the DXY
The “knee jerk” reaction is when either bad news hits the market or some other Fear event occurs, the dollar will gain in strength. The converse is also true: when the market is greedy, or good news hits the tape, the dollar will fall. A weaker dollar is generally stock market positive, moreover, a weaker dollar is also positive for gold, silver, and other commodities.
Now that you have some understanding of the “Fluidity of Money,” you can begin to make accurate investing and trading decisions that will keep you light years ahead of anyone who does not know these simple market dynamics.
Below is a chart to help illustrate the concepts in this article.
HOW TO STAY AHEAD OF THE MARKET
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by Gregory Mannarino, TradersChoice.net