If you want to predict the US market, look to Japan
My recent
article looked at a leading relationship between banking stocks and the
S&P 500 Index of large cap stocks. That, in turn, led me to
investigate broader relationships among speculative stocks (those with volatile
price behavior and earnings), non-speculative issues (those with relatively
stable price changes and earnings), and the broad market. As I document on
my research site, speculative
stocks tend to lead the S&P 500 over short time frames, providing traders
with a potential edge.
While these analyses are helpful and promising, there’s no reason that the
search for leading relationships should be limited to U.S. markets. Might
there be lead-lag relationships between U.S. indexes and those of other
nations? With the increased globalization of economies and markets, such
relationships make a great deal of sense, but might fly under the radar of
U.S.-centric investors and traders.
Interestingly, this past week the U.S.
(
SPY |
Quote |
Chart |
News |
PowerRating)
has been up by over 1.7%, while Japan
(
EWJ |
Quote |
Chart |
News |
PowerRating) has been down by slightly over 2%. This is unusual, as the
daily correlation between the U.S. and Japanese markets has been significantly
positive–approximately .57–since March, 2003.
Going back to March, 2003 (N = 739 trading days), I found 156 days in which
the U.S. (SPY) has been up more than 1.5% on a five-day basis. Ten days
later, SPY has been up by an average of .52% (99 up, 57 down), no better than
the average five-day gain for the entire sample: .61% (456 up, 283 down).
Interestingly, however, when we divide those strong five-day periods in SPY
in half based upon the relative performance of Japan (EWJ), a clear pattern
emerges. When SPY is up by more than 1.5% and EWJ is relatively weak, the
next ten days in SPY average a gain of .95% (55 up, 23 down). When SPY is
up by more than 1.5% and EWJ is relatively strong, the next ten days in SPY
average a gain of only .09% (44 up, 34 down).
One interpretation of these results is that when traders around the world are
bullish, prices are less likely to continue their rise in the U.S. than if U.S.
strength occurs during weaker international performance. Indeed, of the 19
occasions in which SPY was up by 1.5% over a five day period and EWJ was
unchanged or down, the next ten days in SPY were bullish 16 times–over 80% of
the time. This has to be rated a bullish factor over the next two weeks
and suggests that further exploration of international equity relationships
might pay off handsomely.
Brett N. Steenbarger, Ph.D. is Associate Clinical
Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical
University in Syracuse, NY and author of The
Psychology of Trading (Wiley, 2003). As Director of Trader Development
for Kingstree Trading, LLC in Chicago, he has mentored numerous professional
traders and coordinated a training program for traders. An active trader of the
stock indexes, Brett utilizes statistically-based pattern recognition for
intraday trading. Brett does not offer commercial services to traders, but
maintains an archive of articles and a trading blog at www.brettsteenbarger.com
and a blog of market analytics at www.traderfeed.blogspot.com.
He is currently writing a book on the topics of trader development and the
enhancement of trader performance.