Whatever traders and investors contemplate in trading, here are five main indicators that should help traders evaluate market conditions.
1. Bond Yields
On the T-bill front, with the near end of the second cycle of quantitative easing (QE2) and the Federal Reserve pulling away from the support of the US Treasuries, one would anticipate that the Treasury prices will eventually come down. A healthy range of US bond yields should it move inversely to prices is between three and four per cent in the current scheme. Any break from this band should trigger panic for traders. Bond yields specifically the 10-year yields are definitely worth investigating. All eyes are on spreads on the US Treasury notes, Eurozone bonds and even the much lesser UL gilts.
2. Dollar Index
Since the 70’s, the dollar index has monitored the strength of the dollar against other popular currencies including, the Swiss franc, sterling and yen. It was benchmarked originally at 100 and was traded as low as 70 five years ago and as high as 148 in the mid 1980’s. With major commodities quoted basically in dollars, the index also indicated the health of the market. The dollar index has broken below its multi-year level trends and there has been a bit of bouncy movements recently.
3. Crude Oil Prices
Ever since the remarks regarding the soaring price of crude oil along with the geopolitical instability experienced so far, it’s not a wonder why the price of oil cannot be held at bay. The price of oil is very speculative and is considered the largest anti-dollar trend existing today. It is very difficult to know how much of the price is controlled by markets and how much the current price is being scrapped. With the uncontrolled price hike there will definitely be some demand destruction but there is only so much of this potential outcome due to the level of reliance upon the limited fuel source.
4. Volatility Index
The volatility index is overseen and measured by the Chicago Board of Options (CBOE) which was launched the VIX way back in 1993, which was tasked to track the S&P 500. Markets will normally see a VIX level of around 16 and 16 per cent. Anything above this is an indication of anxiety in the market. In 2008, it saw numbers as high as 90 and in the recent flash crash of last year resulted in the number dwindling down to the 45 mark.
5. Precious Metals
Perhaps precious metals are indeed the only real money nowadays. Gold has been the forerunner in the headlines since the start of the year, seeing a large amount of investor inflows during the periods of market volatility. Most indices this year have fallen when converted to the price of gold. Over the last 2 decades, central banks have been the primary net sellers of gold, but now they are net buyers especially in emerging markets. China in particular, as central banks want to be unique in terms of their euro, dollar and yen dealings.
If traders are prudent enough to religiously monitor the above mentioned indicators, then they should have no problems identifying potential threats to their trading activities.