As a money manager or investor we are forced to deal with significant stock and bond movement. We must know how those moves will affect the markets we trade (or the stocks we own).
If I tell you that the S&P is a low risk buy then a currency trader should feel more comfortable with a long position verses the Euro or the Yen. Let’s test it:
I use the following rules:
- Buy the A$/EC cross if the index is > 65
- Short the A$/EC cross if the index is < 35
If the index is in between these two levels, there is no position.
Let’s say your are in Europe so you are predisposed to follow and trade the DJ EuroStoxx Futures contract. We set 2 rules:
1) If the S&P Fuel Gauge is > 25 then we can buy or hold 1 Eurostoxx contract.
2) If it is less than 25 then we must exit and wait.
Just to be clear, this rather uncreative approach made 600 points over the entire 10 year period while the index lost 750 points. (If you want to see the entire data set, contact me)
Utility stocks are a little like a combination of stocks and bonds so we could use our Risk Parity Index to decide when to own it. These are the rules:
1) The index must be > 50
2) We buy a quantity = Index/50 so we can give extra weight to very high readings.
Here are the results:
It is evident that we can smooth out returns and make as much money as the index offers us.
*Beware however, this is an index, not a tradable contract so the results are artificial.
There are many such reliable relationships between markets so you’re ability to use the indices to trade other markets is only limited by your own imagination.