This One U.S. Stock Can “Predict” the Next Breakout in Currencies
By Sean Hyman, Editor, Currency Cross Trader
Back in my stock broker days, I learned a neat Wall Street trick.
The wise, old traders taught me to watch the financial stocks (particularly the bank stocks), to get clues about the overall stock market.
For instance, if all stocks were in a nice healthy bull market, then you could bet the banking stocks would be climbing too.
On the other hand, when stocks are heading higher but banks are NOT climbing, then you know something fishy is going on. Usually, that stock market rally won’t last.
As a currency trader, I’ve taken this rule of thumb one step further. I’ve boiled all the financial stocks down to a single stock that can help me gauge the overall stock market.
By watching this one U.S. stock, I can also time the currency market – and predict which currencies will rise next. I’ll tell you how in a second. First, let’s take a closer look at the banks.
Why Banking Stocks Can Tell You
“What’s Really Going On”
If you think about it, it makes sense that bank stocks can give you an accurate picture of an economy’s (and stock market’s) health.
When an economy has real growth, businesses generally perform well. When business is good, corporations secure capital to make improvements. Capital comes first, and then you get expansions, mergers and acquisitions, etc.
That capital doesn’t come from excess profits. It usually comes from bank loans. When a company is doing well, banks are happy to lend them additional capital for expansion.
Since the capital/loans come first, banks often benefit first from an economic expansion. Banks earn interest off these loans. As a result, bank stocks shoot higher.
On the flipside, when an economy overheats, banks tend to cut-off funding to the major corporations. Banks do this when they feel risks are rising. As a result, banks earn less interest, and their stocks correct.
That’s why bank stocks tend to head lower first, and then the rest of the stock market follows. In this way, bank stocks can “predict” a stock market correction.
To make this concept even simpler, I like to hone in on one bank stock, to gauge the economy’s overall health. I’m talking about J.P. Morgan Chase (JPM).
Who Knew a Banking Stock
Was So Intelligent?
Why J.P. Morgan? Two reasons…
First, it’s the Fed’s “bank of choice” for corporate bailouts. The Federal Reserve used J.P. Morgan to bailout Bear Stearns back in the day and more recently AIG and Fannie Mae. So this gives J.P. Morgan a lot of clout in the banking industry.
The other reason is J.P. Morgan’s CEO, Jamie Dimon. Many investors believe Dimon is the smartest bank president in the entire industry. So when Dimon speaks, the whole world listens.
All this makes JP Morgan Chase the heart of the financial industry.
JP Morgan Goes Nowhere for Two Years
As you can see above, J.P. Morgan has traded in a range for the past two years – between $35 and $47 a share.
As I’ve mentioned here before, several currencies follow the stock market up and down on a daily basis – while another handful of currencies buck against the trend and tend to do the exact opposite of stocks.
So knowing which way stocks are heading is important for a currency trader.
Since J.P. Morgan has been trading in a range between $35 and $47, I know that if this stock breaks below $35 or above $47, it will set the tone for stocks for the next six months at least.
If J.P. Morgan drops below $35, it will likely pull down the rest of the stock market too. That will give currency traders an excuse to buy “risk-off” defensive currencies, like gold, the Swiss franc, Japanese yen and U.S. dollar. All four are likely to profit then.
However if JP Morgan climbs above $47 and holds above that, then stock traders will be licking their lips to load up on stocks. At the same time, currency traders will be buying the “risk-on” offensive currencies.
That’s when currencies like the Aussie dollar, Canadian dollar and New Zealand dollar would dominate the scene.
This Cycle will Lead You to Your Next
Round of Currency Profits
Just remember: so goes JP Morgan, so goes banking stocks – and so goes the rest of the stock market.
Once the stock market starts moving, it will tell you which pack of currencies will prevail over the following 6-12 months minimally.
Again, you can learn all this by watching J.P. Morgan’s price.
Even better, J.P. Morgan is about to breakout out of a sideways range. Once any stock breaks out of a long sideways range, it creates long-and-strong trends – either to the upside or downside.
That means once this stock starts trending, it will likely move the entire stock market (and currencies by extension) for months on end.
Let’s all hope, for the global economy’s sake, that the breakout is to the upside. But either way, you can gain profits in the currency market.
So keep an eye on J.P. Morgan. It can tell you when this important breakout is finally coming. You can be sure I’ll be watching it, and I’ll let you know if we reach a crucial tipping point in this stock.
Have a Nice Day!
Sean Hyman
Editor, Currency Cross Trader