Want to Know How US Stocks Will Do? Just Watch Asia

Key Points

US markets have followed Asian markets on the way up since July 1.

A rise in commodity prices is seen as key in stock gains around the world.

Figuring out which way the US market has been headed over the past month has been as simple as watching the Asian markets.

The various indexes in China, Japan and across the continent have served as fairly reliable leading indicators and are increasingly catching the eye of traders looking for each day's direction.

"The emerging markets have been leading the way. They were the ones to bounce the highest and strongest since early July," says Sam Stovall, chief equity strategist at Standard & Poor's. "People are more optimistic about international than the US and are more optimistic about emerging markets in particular."

Tokyo Exchange
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That optimism has carried over into a nice rally for US stockssince the July 2 lows. The Standard & Poor's 500 has gained 9.5 percent since then despite a protracted series of mediocre economic reports and an earnings seasonthat has exceeded estimates in about the same manner as the past two quarters.

US averages have largely mirrored the performance of the Asian indexes such as the Nikkei, Shanghai and the Hang Seng.

Among the main reasons traders cite for the relationship is investors' realization that the US economy has slowed to a near stop, and the lion's share of global demand will be coming from China and other developing economies in the region. Though that shouldn't necessarily help boost US stock prices, the strong gains in Asia seem to give a lift to investor sentiment in America.

"China is the world's second-largest economy," says Ryan Detrick, senior technical strategist at Schaeffer's Investment Research in Cincinnati. "There is a correlation with commodities and steel stocks. Copper prices just broke out to multi-month highs recently. Some of that is correlated with Asian markets."

Indeed, the commodity marketsare the third integral player in the triangle of influence that has moved the markets for the past month.

Crude oil prices have climbed more than 12 percent and copper —sometimes called "Dr. Copper" for its way of leading the financial markets—is up nearly 17 percent since July 1. The Reuters/Jefferies CRB Index, which measures a variety of commodity prices, has risen 14.5 percent in the period.

"We're taking our cues" from the CRB, says Dave Lutz, managing director of trading at Stifel Nicolaus in Baltimore. "A lot of commodities have had a very nice bid. A lot of infrastructure stocks and commodity-level stocks have had a very nice bid because people think China is done with their tightening process and is going to open up a bit."

Lutz sees a variety of areas benefiting from the commodity strength and the ability of Asia to lead the US markets.

Railroad stocks such as Freeport-McMoRan and Southern Copper could gain.

With wheat prices also soaring amid a Russian drought, Lutz says agriculture-based companies such as Deere could do well, along with fertilizer leaders such as Monsanto and Mosaic .

But some strategists are saying the trade goes beyond isolated areas of the market.

The US economy finds itself in a quandary—strong corporate growth is providing a contrast against weak consumers. That is particularly relevant in areas of employment and consumer spending and income, which was flat in Julyeven as earnings reports showed strong profits.

Asian companies and more particularly consumers, then, are being seen as the driver of the global economy and, for the moment, what will cause US corporate strength and the reason to buy stocks.

In a recent essay, Pimco's Richard Clarida said the Asian equity markets "are where traders in Europe and the US look to see if it is a 'risk on' or 'risk off' day.

"With so much money chasing fewer assets with known return distributions, and with reliable investment rules of thumb scarce, frequent flips between 'risk on' and 'risk off' days will likely be a continuing symptom of the...uncertainty that still, to some extent, hangs over global financial markets."