Well it's been a long while since I've posted to this blog, but I've been learning incredible amounts since starting to trade full-time and I want to share some of them with you.
The financial markets are a complex machine, a collection of Billions of buyer and sellers of a wide variety of financial instruments.... stocks, futures, bonds, forex, derivatives and other structured products.
Most beginner traders look at individual stocks which are usually the well known and talked about stocks like RIMM, GOOG, AAPL, GM, DB, etc. and they try to trade single stocks and pick winners or time the long and short positions in each of these stocks just by looking at their charts. BUT they don't see or grasp relations in the financial markets yet and they get frustrated about why that stock didn't go their way.
Let me give you a broader view, investors bring money to invest, the collection of all the money in the world is limited. Even though this isn't completely true, it helps if you think of all the money in the world as a constant amount. Now all this money wants to be invested for the MAXIMUM return with MINIMUM risk at every second of every trading day! For this to happen the money has to MOVE from one place to another, and from one instrument to another. Also at any one time, certain financial products are more favorable and promise better returns than other, or perhaps more safety than others.
For example, let's say investors own bonds in Alcoa which pays 6% interest, now all of a sudden Alcoa offers another set of bonds with the exact same characteristics as the first, except it pays 10% interest.... wouldn't you expect the savvy investor to sell his 6% bonds and come buy the 10% bonds? ... So the price of the 6% bonds goes down as demand goes down, and the price on the 10% bonds go up as demand goes up.
The world financial markets work exactly the same, total invested money stays the same, but it gets moved to what is perceived to be MORE favorable. So recently you've seen US stocks go down while everyday treasuries go up. Investors are seeing stocks as risky and treasuries as safe... so money comes out of one and goes into the other and it drives their prices respectively.
Now take one step back beyond the US markets and look at it globally... there are millions of other investors in the world they want to put their money in the best place. But what if all of a sudden US is thought of to be near bankruptcy?? Now it's not safe for anyone's money. So global investment money would come out of the US as a whole and go somewhere else, maybe for example Asian Stock Markets! So now US stocks AND treasuries fall as demand for ALL products go down.
So the single US stocks that you may be looking are a molecule in universe of global financial markets. Although important, greater forces are at work when it comes to if that stock will move up or down. So no matter how great of a company Google or Apple is, when money is in rotation and it rotates out of stocks, or out of the US markets in general they will go down.
There are millions of factors which dictate where money will go, but let's look at one example, if US Dollars become cheap relative to global currencies, then buying US investments becomes cheaper for the global money. The European fund that was looking to buy the S&P500, for 1 Billion Euros can now buy MORE of those shares because his 1 Billion Euros buys more US Dollars now.... so US markets are little more attractive now! So exchange rates too have an impact on the markets and the stocks you select.
Although this was a very brief description, it gives you an idea of how everything is interconnected and when deciding what to buy or sell, you have really take a step back and see the whole picture... because these forces are the MAIN forces driving markets and you should not bet against them!
