It’s tough to get an edge in the stock market.
Some analysts build complex algorithms to make predictions. Others have turned to “alternative” datasets like satellite imagery to count vehicles in retail parking lots.
Those types of data can help.
But right now, I have my eyes glued to a time-tested barometer for stock market moves.
It’s called intermarket analysis, and I’ve used it with great success to divine the sectors that offer the next big profit opportunities.
This technique looks at other financial and commodity markets to learn more about stocks and investor sentiment.
After all, global financial markets are intricately connected like a spider web. Start to pull on one thread, and the whole thing starts to shift.
Understanding these relationships is especially important with the uncertainty surrounding Election Day. With less than one week until the vote, we’re all wondering how the stock market will handle the outcome.
As of Wednesday morning, the Dow Jones Industrial Average has plunged nearly 1,500 points this week. Is this a sign of things to come, or will the stock market’s relentless march upward resume?
Today, I’ll show you three charts that give clues to the answer.
Will Stocks Resume Their Rally?
For a good indication of what’s next for stocks, simply take a look at high-yield corporate bonds … specifically the spread that investors demand above and beyond the yield offered by U.S. Treasuries.
Companies issuing high-yield bonds are already of lower credit quality. So their investors watch the outlook for these companies very closely.
If things appear bleak, they demand higher compensation and vice versa.
Spreads have traded sideways for a couple of months heading into the election. But if junk bond investors are content with the voting outcome and push spreads back below 3.5%, that’s good news for stocks.
That’s because this corner of the bond market is signaling better times ahead for companies that are extremely sensitive to the outlook for the economy.
Can Tech Stocks Continue Higher?
Depending on the outlook for stimulus packages and deficit spending after the election, government bond yields could see big moves.
That’s important because interest rates play a very important role in stock market valuations. We saw that recently, when the plunge in yields following the pandemic boosted stock prices dramatically.
This is especially true for high-growth tech stocks, as Ted and I explained in a YouTube video earlier this month.
So watch the 10-year treasury yield closely as election results arrive:
Rates have already started inching higher over the last couple of months. A move back over 1% would make investors rethink valuations in the growth and tech space. It would also boost cheaper stocks in cyclical sectors of the economy.
International Stocks’ Time to Shine?
There’s been a lot of investor attention on the value of the U.S. dollar heading into the election.
That’s because currency movements can have a big impact on stocks and corporate profits in a number of ways.
It can also signal the best geographic areas for investing, as investor money floods toward the best profit opportunities and drives currencies higher or lower.
For much of the past decade, the greenback has reigned supreme. And U.S. stocks have trounced international indexes over that time.
But the U.S. Dollar Index has weakened recently, and a further decline below the 90-mark would signal a resurgence in appetite for international markets.
No one knows what next week will bring. But we do know that uncertainty will likely bring more stock market swings. So, keep watch of these other markets to be ready for the next stock market move.
And remember to stay smart and tough!
Best regards,
Research Analyst, The Bauman Letter
