WHEN MARKET FORCES COLLIDE

by Gregory Mannarino
Understanding two essential drivers of the markets gives us incredible insight into understanding where markets are going.
In this exclusive Trends Journal article, I am going to outline how you can easily “read” which of these two forces are driving stocks – and, more importantly, how to capitalize on them.
It is no secret that today’s markets have no bearing on reality, with massive distortions existing across the entire spectrum of asset classes. For over a decade, the main driver of these distortions have been artificially suppressed rates via the Federal Reserve’s epic sums of easy money being pumped into it.
The mechanism of suppressed rates and easy money is designed to do one thing: inflate the stock market. By design, this mechanism causes malinvestment, What this means is cash moves into risk assets by being pulled from other assets where cash should be going. So, what you get are massive imbalances in the market.
In many ways, the market is a living entity, in that it represents the collective consciousness of every participant. Today, roughly 20 percent of the market is driven by algorithms. These algorithmic platforms execute trades when an asset’s price action meets certain parameters, but, by and large, the market still remains under human control, which means that human emotion plays a major role in determining market direction.
So, what are these two forces?
Fear and Greed… and Fear is stronger.
How can we determine that Fear is stronger? There is a simple analogy, which is also a Wall Street mantra: The Market Goes Up Like an Escalator but Drops Like an Elevator.
The market tends to drop much faster than it goes up. The fact that the market falls much faster than it rises is a clear indication Fear is stronger than Greed. When Fear is gripping the market, invariably, two things happen, which are easily seen and measured.
#1. Observe the 10-year yield. I have explained to those who follow my work that by simply observing the 10-year yield, they can determine market direction. The 10-year yield reacts very quickly to both Fear and Greed.
Here is how it works: If the 10-year yield drops, it is a clear indication that cash is making its way into the debt market and coming out of stocks, so Fear is winning. Conversely, if the 10-year yield is climbing, it is a clear indication that cash is coming out of the debt market and making its way into stocks, therefore Greed is winning.
#2. Observe the dollar index, also known as “Dixie.” (It is called this because it trades under “DXY.”) When Fear is gripping the market, you will see a “knee jerk” reaction of people wanting to hold dollars, therefore the DXY will gain. When Greed is gripping the market, the DXY will drop.
Much of what I am discussing here goes back to a concept I have spoken about in the past called, “The Fluidity of Money.”
By simply observing where “cash is moving,” we can make exceedingly accurate predictions as to where markets are going. Moreover, by just observing the 10-year yield and the Dixie, we can physically see which of these two major market drivers, FEAR or GREED is driving the market.
Happy Trading!