Trade The Journey

Trade The Journey

Interwoven Strategy

As an investor, should you be concerned about the prices of commodities or the inflation rate? Or what about the FED’s target of raising the interest rates more than once next year? What does this mean about the FED’s assessment of future conditions for you as an investor and a citizen?

What does this have to do with you as a stock investor? These tidbits of information you receive throughout the day have a significant effect on your income and your investments. This information can help you make wise decisions if you understand how to process the information as a second level thinker. If you talk to the average investor, they might be focused on their company, the industries that company is part of and maybe the economy as a whole. But you as a strategic investor should be concerned with more than that.

You need to be aware of bond prices, commodity prices, the currency exchange, options, and debt markets to make an accurate assessment of where the market is headed. You also need to be aware of a companies dealings in international waters. For example, how will the trade relationship between China and the US affect Apple? How did the tariffs affect farmers and how did it affect Caterpillar?

The markets are interwoven and one event in one market affects the next.

This is what is called intermarket analysis, a branch of technical anaylsis. Charlie Munger, Warren Buffetts’ esteemed colleague, has said on many occasions that you must have different mental models to be successful in the stock market. Which I took as you must have different strategies for dealing with situations as they arise. Although situations may look the same, they are not and learning how to develop different strategies for the same situation will help you to become a nimble investor.

What better way to do this then have a broad understanding of the different markets and how they affect each other. Here is some information I picked up from an intermarket analysis book, I am reading to get you started.

  • Commodity prices and bond yields can trend in the same direction.
  • Bonds tell us which way interest rates are heading, a trend that influences stock prices.
  • Commodity prices tell us which way inflation is heading which affects bond prices and interest rates.
  • The US dollar determines the inflationary environment and the direction of commodity trends.
  • Commodities respond quickly to general economic changes before the economy.

As you progress, you will probably develop your own indicators to signal when the market is headed for a downturn or upturn and how you should structure your investments accordingly. No one can predict where the market is headed but if we begin to develop some reliable clues, we’ll have a better chance of weathering the storm.

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