You should be able to recognize what moves the stock market down and how to counteract those movements in the forex market. We are going to focus when the stock market goes down like the present.
Contrarian theory suggests that when an overwhelming majority of investors begin to think alike, the majority is bound to be proven wrong in not too distant a future. When people start seeing the stocks go up, they become excited.
Some jump in early. While most stay on the sidelines trying to figure out whether the stocks will go more up or not! As the stock market begins to move higher and higher, more and more investors jump in as they now believe in the upward movement.
The up trend continues. Stock prices continue to rise. Majority who has been sitting out decide they cant afford to miss out on any more profit making opportunities. They jump into the game finally near the top of the uptrend. The savvy investors who have been enjoying the bullish run decide to take profits and run at about the time that these investors are jumping in.
The selling generated by these people eventually begins to pull the market down and people start to panic. Suddenly there is a mass fire sale as investors begin to unload their positions and the market crashes.
S&P 500 represents the market capitalization of 500 largest US companies that are traded on the US Stock Markets. The S&P 500 Stock Index is the most recognized US stock market index in the world. You can track the movement of the S&P 500 through an ETF, the Standard & Poors Depository Receipts (ticker symbol SPY).
When the US economy does well, S&P 500 index rises. More and more investors invest in US stocks. The value of the US Dollar rises. S&P 500 index is closely correlated with the US economy.
Conversely, when the US economy does not perform well, S&P 500 index falls! More and more investors want out of the US stocks. The value of the US Dollar falls. By monitoring the movement of the S&P 500, you can predict the direction of any currency pair involving US Dollar on one side. The easiest way to monitor S&P 500 is to invest in SPY.
Invest in SPY to see how the stock market is going to affect your portfolio. It is the easiest and the best way to get a clear perspective on what is happening in the US economy and the market place.
Whether you invest in SPY or not, you need to keep track of it. You can watch it on a weekly basis. While the forex market will immediately react to some short term movements in the US stock market, it is more susceptible to the longer term influence of the stock market.
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