Question:
I’ve noticed that some markets seem to
lead others, is that correct?
Answer:
There are relationships between some
markets, as your question pointed out; however, these are only loose
relationships that might hint to the direction a related (or unrelated)
market could take. While it can be helpful to know about these
relationships, it would not be valid to use this relationship as a primary
decision making tool.
For instance, it is well know that there
is an inverse relationship between the grain and meat markets. Knowing this
relationship between these two markets exists can be helpful in calling the
next direction either market might take; however we would not trade these
markets based solely on this relationship since it is not as reliable as
following what is happening in each particular market, regardless of the
relationship.
For instance, the Mad Cow scare in
2003 in the Cattle market nullified any relationship between the grain and cattle
market. Cattle prices escalated along with the grains as supply fears drove
prices higher at a time of year that we normally see lower prices.
Unlike the indirect relationship between
grains and meats, other markets have a direct relationship which can “hint”
to future price direction of the other related market. For instance, Feeder
Cattle tend to lead Live Cattle. Normally a Feeder and Live chart look
identical; however occasionally Feeder’s will make a stronger move which
would suggest a corresponding move should follow in Cattle.
Likewise Live Hogs tend to lead Pork
Bellies have a similar relationship as do Feeder’s and Live Cattle. I’m not
a Hog or Bellies trader myself, but I mention it for those of you who are
interested in these markets.
Even markets within a certain category do
not always behave the same. For instance in the grains: wheat, corn, oats,
beans and meal might all be going one direction, yet bean oil could be
moving contrary to the other grains. You will find that this is the case
for most commodity categories, there will be a predominant trend among most
of the markets within the category, but one or two will always be moving in
the opposite direction.
Knowing these types of things help round
out your trading education, but to answer your question, you should only
trade a market based on what you see in that market, and use things like
relationships to other markets to back up your trading decisions.
-Erich
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Some Futures Markets Lead, Others Follow
