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Other markets, such as the bond market, commodities, derivatives, futures, foreign exchange, options and overseas stock markets are related to the U.S. stock market. Some knowledge of these other markets is necessary to have a comprehensive understanding of the U.S. stock market.
The significance of the Internet sites that deal with related markets is that the factors that affect those markets are largely the same as those driving the stock market. Furthermore, when those markets move the stock market usually moves too. Related markets may move in advance of the stock market so some can provide a leading indicator of the direction in which the stock market is likely to go.
The main, online sources of free education for the stock market investor in these related markets are briefly examined below. However, only a few of the sites that provide information about related markets are mentioned. Investors should be able to use them as a starting point for their own research.
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Related Markets Education
Though not strictly on the topic of U.S. stocks, which is the subject of this guide, other markets, such as the bond market, commodities, derivatives, futures, foreign exchange, options and overseas stock markets are related to the U.S. stock market. Some knowledge of these other markets is necessary to have a comprehensive understanding of the U.S. stock market.
The significance of the Internet sites that deal with related markets is that the factors that affect those markets are largely the same as those driving the stock market. Furthermore, when those markets move the stock market usually moves too. Related markets may move in advance of the stock market so they provide a leading indicator of the direction in which the stock market is likely to go. John Murphy of http://www.stockcharts.com/ is perhaps the leading writer about intermarket relationships and his books on the subject are worth reading.
The Bond Market Association says bond market debt is more than $23 trillion
The bond market is larger than the stock market and bond market analysts are generally regarded as smarter than stock market analysts, so taking a lead from the bond market is sensible. For example, the bond market usually turns before the stock market. Rising commodity prices may indicate more inflation, which could lead to a decline in the stock market. Commodity prices also affect the stocks of companies that are based on commodities. Options are a major indicator of the complacency or nervousness of the market. Futures usually lead the markets, so a more advantageous entry and exit may be made by watching the S&P 500 and Nasdaq futures charts. A stronger dollar is mostly good for the stock market whereas a weaker dollar often leads to higher commodity prices and inflation. Overseas stock markets can often give an indication of how the U.S. stock market is going to open. Please note “often,” for it is certainly not always true that the market inter-relationships are as described, particularly over shorter time periods and when the markets change direction. For example, the bond market can go with or against the direction of the stock market.
The main, online sources of free education for the stock market investor in these related markets are briefly examined below. However, only a few of the sites that provide information about related markets are mentioned below. Investors should be able to use them as a starting point for their own research. Alternatively, key the words into any search engine.
Bonds
When looking at the bond market, be sure to differentiate between prices and yields. When one goes up the other goes down. Both are commonly used in conversations and articles.
One of the most important reasons that stock market investors are interested in bonds is to keep an eye on the yield curve. The yield curve is a chart of yields consisting of short and long term Treasuries. If the short-term yields are higher than the long-term, the curve is said to be inverted or negative. A negative yield curve is the most reliable predictor of a poor economy. The yield curve is addressed further in the Conclusion Section dealing with Market Timing, Chapter 18.
John Mauldin of http://www.frontlinethoughts.com/ or http://www.2000wave.com/ says that the yield curve is one of the best long-term indicators. He reported that Federal economists Arturo Estrella and Frederic S. Mishkin of the Federal Reserve Bank of New York, published a paper that showed every U.S. recession in post-WW2 that has been preceded by a negative yield curve. A negative yield curve has the short-term rates higher than the long-term rates. According to http://www.investorsnet.blogspot.com/, the shape of the yield curve for U.S. Treasuries is the single best indicator of the future economy. Hence it is important in timing the market.
http://www.smartmoney.com/ has an article on The Living Yield Curve which describes what each curve shape (normal up sloping curve, steep, inverted and flat or humped) means for the economy. Basically, the steeper the curve, the better the outlook for the economy.
To learn more about Bonds, we can go to sites such as
http://www.bondmarkets.com/ site of The Bond Market Association.
http://www.bondsonline.com/ provides basic education on bonds and includes a daily quiz.
http://www.investorguide.com/ has a university section that provides papers on bond concepts, different types of bonds, and why bonds might have a place in your investment portfolio.
http://www.investinginbonds.com/ site of The Bond Market Association.
http://www.mfr.com/ has a Bond Primer that covers types of bonds, portfolio structure, yield curves and trading bonds.
http://www.smartmoney.com/ has some useful education hidden under Bond Update.
Commodities
Increasing commodity prices are often related to a falling dollar, bond market and stock market. The Commodity Research Bureau futures index is a measure of commodity prices, based on the prices of 17 commodities.
The Commodity Futures Trading Commission (CFTC) issues a Commitments of Traders (COT) report each Friday. The report provides a breakdown of each Tuesday’s open interest for markets in which 20 or more traders hold positions equal to or above the reporting levels established by the CFTC. The report shows the positions of the Commercial traders, the large speculators and the small speculators. Usually, the critical point to watch is the difference in the positions of the Commercial Traders and the Small Speculators because the Commercials are usually right and the small speculators wrong.
http://www.cbot.com/, site of the Chicago Board of Trade, provides simple education on agricultural futures.
http://www.cftc.gov/. explains various forms of the COT report.
http://www.commitmentsoftraders.com/ and http://www.cot1.com/ have George Slezak providing an explanation of the COT report.
http://www.futurespartners.com/ provides a good explanation under Futures Trading Articles.
http://futures.tradingcharts.com/ has a 12-part short course introducing commodity markets and futures trading. It maintains a long list of commodity brokers, though it is impartial and does not recommend any particular broker. A glossary of several dozen phrases explains the terms used.
http://www.jimwyckoff.com/ has an article by Jim Wyckoff.
http://www.refco.com/ has more information on Commercials and the Public in the Education section under Larry William’s Trading.
http://www.softwarenorth.com/trading and http://www.futuresbuzz.com/ also have explanations of the COT report.
Derivatives
A derivative is a financial contract with a value that is based on an underlying security. Options and futures contracts are examples of derivatives. One of their main uses is to manage risk, but Warren Buffet in his 2002 annual report for Berkshire Hathaway called them financial weapons of mass destruction.
The volume of trading in derivatives in the U.S. has been increasing sharply. The Chicago Mercantile Exchange, Chicago Board of Trade, Chicago Board Options Exchange, American Stock Exchange, Philadelphia Stock Exchange, New York Mercantile Exchange and the Pacific Exchange handled billions of contracts last year.
http://invest-faq.com/ provides a briefing on derivatives, with eleven short articles on options and futures, covering the basics, the Black-Scholes Option Pricing Model, Long-term Equity Anticipation Securities (LEAPS), Stock Option Symbols, Futures, and other topics.
http://www.thepitmaster.com/ has a dozen articles in the Tips and Tricks section of start off with an overview of options strategies and techniques.
Futures
http://www.alarontradingacademy.com/ has a list of the contract months: F, G, H, J, K, M, N, Q, U, V, X, Z for January to December.
http://www.cbot.com/, site of the Chicago Board of Trade, provides additional e-mini education for the Dow e-mini. Moreover, it has tutorials on agricultural futures in addition to its tutorials on mini-sized Dow futures for new traders.
http://www.cme.com/, site of the nation’s largest futures exchange - the Chicago Mercantile Exchange, has classroom and online courses on futures and options trading. More than a dozen Web Instant Lessons briefly describe basic topics. The Exchange also has an E-mini Education Center that offers live and audio-visual training.
http://www.fiafii.org/, site of the Futures Industry Association, has helpful articles in their Futures Industry magazine.
http://www.futuresmag.com/ has a classroom that pays particular attention to beginner’s education.
http://www.nybotlive.com/, site of the New York Board of Trade, has an audio-visual tutorial on “How To Trade Futures.” It is one of the few places that provide education in discipline, money management, and the psychology of trading. It identifies the fact that one of the main reasons that futures traders lose money is because “their trades are based on local, superficial, insufficient, or no information.”
Foreign Exchange
All the education that a stock market investor needs to have in regard to foreign exchange can probably be found under the heading of economic education. For more specific information http://www.fxstreet.com/ is a good place to start. It leads to a host of other sites for news, charts, opinions and education. Its education section has more than a dozen educational pieces that need to be read because most apply to stock market investing as well as the foreign exchange currency market. There is also a 15-question quiz to test Forex knowledge. http://ac-markets.com/ has some educational articles. http://www.forex.com/ has a Learning Center that provides basic articles comparing forex against equity trading, and more advanced lessons such as trading short-term trends.
Options
As investors in the stock market, our main interest in options relates to implied volatility. The measures of market volatility such as the VIX, VXO and VXN are calculated from option activity. Those of us who are knowledgeable and experienced investors could be interested in options for other purposes, such as hedging positions and taking a position without buying the stock.
http://www.888options.com/, site of the Options Industry Council, has an Options University section that includes online courses divided into beginner, intermediate and advanced. It also has The Options Investigator, which it claims is a comprehensive options learning tool to be used by novice and advanced options investors. The online reference material is reasonably comprehensive, and there are free live classes in many cities across the nation. The Options Industry Council education can also be accessed through The Options Clearing Corporation, http://www.optionsclearing.com/, which has some additional education on options and on futures.
http://www.cboe.com/ has a Learning Center that provides the Options Institute Online Learning Center’s tutorials. More than 220 short pages cover options basics, how a trade is made, and advanced strategies.
http://www.completeoptions.com/ has half a dozen basic articles on options.
http://www.foxinvestments.com/ has several manuals, including Options For Everyone and Blueprint For Success, and a trader’s resource CD in its Special Offers section.
http://www.ivolatility.com/ has an educational section to the Knowledge Base that naturally focuses on volatility and market sentiment.
http://www.iseoptions.com/, http://www.daytraders.com/ and http://www.ivolatility.com/ provide options month and price codes.
http://www.market-harmonics.com/ has an Options Guide that includes an overview of options for beginners and a paper on understanding options pricing.
http://www.numa.com/ describes strategies to be employed trading options, indexed by whether we feel bullish or bearish about the market.
http://www.nymex.com/ has educational material that is all about options, describing basic options information and nearly two dozen options strategies, such as covered calls, bear call spreads, long strangles and synthetic long puts.
http://www.optionetics.com/ has numerous articles of educational value about options.
http://www.schaeffersresearch.com/ in its Education Section has a considerable amount of information about options.
http://www.tradeaccountant.com/ also has a simple guide to constructing an option symbol.
http://www.optionsnerd.com has John Summa pointing out that it is widely known that options traders, especially options buyers, are not the most successful traders. It is said that options buyers lose about 90 percent of the time.
Overseas Stock Markets
Few people in the world do not recognize that the economy of one country affects the economies of other countries. Prime movers of overseas markets are the health of the economy, and in particular, consumer demand in the U.S. The reverse is also true. Much has been written about the extent to which overseas investors have been buying U.S. financial assets in recent years, partly in an effort to maintain their exports to the U.S. Education in relation to the overseas stock markets can be found above under Education in the Economy and in Foreign Exchange.
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