Who follows and who leads in markets? The answer is surprisingly different to the answer most people assume is correct.
Intermarket technical analysis is a useful strategy tool for asset allocation. Its also a useful tool for working out what may happen in the future. Its too easy to look at markets in isolation, or to use outdated assumptions about market relationships. This is lazy thinking and in a changing market environment it can cost a fortune.
We publish hundreds of charts each year in our financial newsletter publications and in columns for international and Chinese financial media. The chart below is the probably the single most important chart you will see in 2009. You will need to put aside lazy thinking and assumptions to fully understand it.
This is not a technical chart. It’s a simple combination of 3 indexes, each displayed as a single line. Unlike many comparative charts the indexes have not been rescaled to a single starting point so we can see relative performance in percentage terms. This is not the significant feature of this information.
The charts have been time adjusted so it is easier to compare the behavioural characteristics of the three markets.
We use the Dow Index and the Australian ASX S&P 200 index (XJO) as representative of markets outside the US. The DOW and XJO charts have been time shifted to the left so the absolute market lows of March 2009, match the time of the absolute market low in the Shanghai Index in October 2008. This type of time shifted display clearly shows which market is a leader and which markets are followers.
This chart display confirms that 2009 has seen the most profound change in market dynamics in more than half a century. Put simply, China leads and the DOW follows.