The S&P 500. This stock index consists of 500 of the
top U.S. corporations. It provides a forward look on
the health of some of the largest companies in the
world and is thus a good gauge of the economy
overall.
U.S. Treasury bonds and notes. These influential financial
instruments provide a direct look at current and future
interest rates as well as gauging demand for
government securities.
U.S. dollar index. This currency index shows how the U.S.
currency is faring relative to its trading partners’
economies.
As an analyst or trader you need to do the following:
• Keep an economic calendar marked with the key release
dates.
• Be aware of the major economic releases and the impact
they can have.
• Stay abreast of major international developments and
news as they affect the value of currency prices.
• Know that the currency markets of the major
industrialized nations tend to be self-correcting price
mechanisms. The very things that make a country’s
currency strong, such as a growing business environment
and firming interest rates, in time will have the opposite
effect as that demand will allow those countries’ trading
partners with cheaper currencies and lower interest rates
to undercut their prices, leading to slower growth and
lower interest rates in that country.
• If you are new to trading and economics, do not base
trades solely on fundamentals at this point in your trading
experience. The results are too unpredictable, and the risk
too high. In general, however, fundamental analysis is
most useful for long-term positions.
As you can see from the many examples just reviewed, there
are times when the current trend in the market takes precedence
over the fundamental news, just as there are times when
a news release overrides the current trend. There are no constants
in economic developments and releases because the
economy and the many moving parts that constitute it constitute
a very dynamic process. As traders, many of us devise a
more accessible framework for determining the direction from
which to trade a market not by studying the causes of price
movement—the fundamentals—but by going along with the
effects of price movement. You will never read the phrase fundamentals
versus technicals in this book, as we know and understand
the complementary value of both schools of thought.
Source: Leading Indicators
