By Martin Tillier
Most people who trade or take an active role in their investments are aware of what an overbought or oversold state is in regard to individual securities, or even sectors.“Let the trend be your friend” is generally good advice, but sometimes momentum will carry the price of an asset too far in one direction. Smart people recognize this, and there are indicators such as the Relative Strength Index (RSI) that are designed to point out when that may be the case.
My background in global currency markets, however, has led me to look not just at individual stocks or sectors, but also at how capital shifts between countries.
Assessing whether a particular country’s capital markets are overbought or oversold is somewhat trickier than simply plotting RSI. This can certainly be done for a nation’s currency by looking at the RSI for that currency, either as a pair against another major or in general in terms of the currency index.
Thus, the two year chart for the US Dollar index above would indicate some degree of sustained strength, but a recent backing away from overbought territory.
In this respect, though, currency has an additional factor that makes that analysis less reliable... Central banks have the ability -- some would even say the duty -- to affect the supply of each nation’s currency. The Federal Reserve has spent all of this year adding $85 Billion in supply each month. Regardless of your opinion as to the wisdom of this policy, it is hard to assess the relative strength of the US Dollar given the fact that it exists.
Logically, one would expect an increase in supply to depress the relative value of a currency, so is the strength shown over the last couple of years evidence of a serious bubble in US assets?
There is another indicator that can be used to calculate whether the assets of a particular country are being over or under valued in a global sense. If the percentage of global capital markets of a country is significantly higher than you would expect given their GDP, then that too may indicate an overbought state for those assets. On this basis there is also some evidence that there is significant strength in US markets.
According to the IMF, the US accounted for around 22.5% of global GDP in 2012, while World Bank data indicates that The US capital markets represent around 35% of the world’s total.
At this point, a word of warning is called for. If you are the worrying kind, or are looking for confirmation of your belief that financial Armageddon is just around the corner, please don’t place too much emphasis on this. As you can see from the World Bank chart below, this percentage is not way out of line and, in fact, US capital markets grew less quickly in 2011 than did the global total.
Since then, however, the US stock market has outperformed most other developed nations, so while there is no data yet available, my suspicion is that that percentage is now even higher.
Taken together then, the strength in the US dollar and disproportionate size of the US capital markets would suggest that American assets are somewhat overbought.
But there are reasons for the strength, not least of which is that, while the recovery may be slower than most in the US would like, it has been steady and better than in many places.
That is why I don’t believe that, even if US assets are overbought, it is evidence of impending disaster. It should, however, be kept in mind by individual investors.
The potential for further gains may be higher in other parts of the world in the next few years. If you have exposure to the US in your portfolio that is greater than that of global capital -- i.e. over 50% -- you may want to consider more geographic diversity going forward.
 |
Martin Tillier has a wealth of experience in Foreign Exchange. He started working for a major interbank Forex broker in London in the 1980s, rapidly acquiring more responsibility and the authority to run larger positions. After several years, he was asked to go to Tokyo to develop the cable (USD/GBP) desk there. He returned to London at a time of turmoil in European currency markets and helped build the company's Sterling Mark (GBP/DEM) desk into the world's most profitable, in the years leading up to the Euro. Highlights included a 36 hour unbroken stint at the desk during black Wednesday, when the Pound was forced out of the European Monetary System. Because of his success in London and his ability to teach new recruits the complex world of Forex trading, Martin was asked to establish Spot FX desks in new markets for the company, first in Moscow, Russia, then in Warsaw, Poland. He left the market in 2002 and moved to the US, following the loss of a family member in the tragic events of September 11th 2001. He spent some time out of the markets, starting and running a successful wine store, but the lure of the financial world was still strong, leading to him selling that business and accepting a position as a financial advisor with a major firm. The frustration he felt while there is what led him to his current position as a writer and educator on markets, particularly Foreign Exchange. The markets were more accessible than ever, but it seemed Wall Street was still doing fine. It was obvious that the retail trader and investor were at a disadvantage, and education could close that gap. Martin now writes regularly for Nasdaq.com and other financial sites, trades Forex and other markets successfully and, in his spare time, plays golf badly. |
OUR PRINCIPLES |
1. Our Customers
I think it was Frank Sinatra who once said, 'If you think customers are not important try doing business without them for a while.'
Although he was referring to another singer who didn't like to sign autographs, he could have been talking about any customer in any business.
In our offices here in Delray Beach we keep that quote posted on the wall just to remind us how fortunate to have you as part of our family.
2. No Hidden Agendas
Please forgive the populist tone here, but the sheer audacity of what some brokerages pawned off as "research" in the 90's was stunning. As a result, the New York State Attorney General forced many of them to fund separate independent stock research firms.
We here at the Institute for Individual Investors have no interest in the "conflict of interest" business (we've seen what it does to people.) We do what we do because we enjoy it and we're good at it. Therefore know that we will never accept any payment, in any form, to recommend the shares of any company. Period.
Our goal is to not only provide you with our unbiased opinions, but to also bring you behind the scenes and show you exactly how we form those opinions. Knowledge is your best defense in the investing battlefield.
3. Information You Can Understand
In addition to the research and educational courses we offer, we try to present our facts in a way that will help you understand the rationale behind our thinking.
It is our hope that during the course of our relationship you will gain a more sophisticated framework for making investment decisions both as an investor and as a businessperson. We believe that the more educated you become, the more likely it is that you will appreciate and recommend our work.
4. We Will Always Admit Our Mistakes
Only fools never admit and learn from their mistakes. Good investors are not born they're forged. It's that simple.
5. Real Wall Street Experience
Everybody we hire to teach and inform you will actually have real investment experience.
Need I say more? Well, I will. Why?
Because many of our "competitors" aren't real investors - they're marketers and journalists pretending to have the real world experience that separates the men from the boys.
© 2013 Institute for Individual Investors, LLC.
110 E. Atlantic Ave., Suite 200, Delray Beach, FL 33444, USA
North America: 877-489-2666
International: 561-272-2919
Fax: 561-272-6040
Customer Service Email: support@ifii.com
www.ifii.com
Privacy Policy | Disclaimer | Update your Profile, Unsubscribe, & Update Preferences
Whitelist Us
No comments:
Post a Comment
Keep a civil tongue.