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Some Markets Lead, Some Follow? - 12-21-2003

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, this year’s Mad Cow scare 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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