Sunday, May 30, 2010

This is what a market driven by speculation looks like.

Below is a 6 month chart of  Canadian dollar compared to DOW.

Notice that the two are nearly perfectly correlated.  Some correlation is expected there, after all American companies are a large component of Canadian exports, but it should be nothing like 100%!

This correlation is consistent with the big market participants choosing these two assets to play in, so that when they buy or sell they always allocate their capital in the same proportions. They also choose when to buy or sell not based not on fundamental economic events, but on the access to money - or maybe even based on a whim.

This means that the prices in the markets are driven entirely by the speculation, and lost their relationship to fundamentals. Unless you have close ties to the circle of traders who are driving the market behavior, you have no business staying invested in stocks. However, if you are in that circle, you can trade virtually risk free. That may explain, for example, why Goldman Sachs had zero days with trading losses last year.

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