The S&P 500 index as a market sentiment index!

The S&P 500, like most other global indices, shows general market sentiment at a certain period of time. But the S&P 500, in contrast to the DOW 30, is broader and demonstrates virtually the entire US economy. Therefore, using the example of the S&P 500 index, we will try to determine the market sentiment and learn how to benefit from it.

The S&P 500 index is a stock index that includes 500 the largest US companies by capitalization. Companies in this index are traded on the New York Stock Exchange and NASDAQ. The S&P 500 is a weighted capitalization index. While it is worth noting that this index does not include low liquidity stocks and private companies, which actually makes this index a comprehensive barometer of the US economy and the derivative of the world economy.

Also, the S&P 500 is also called the comprehensive stock index because it includes 500 companies and it is independent from private companies.

What does the S&P 500 index do to trade in the FOREX market?

The index allows you to define more ambitious market sentiment, which can be conditionally defined as positive and negative. So, with the growth of this stock index, we receive a signal for a general strengthening of the entire US stock market, which, in turn, indicates a rise in the dollar or, in certain situations, risky assets. So, with a decrease in the S&P 500, we can expect a decrease in risky assets, and in particular the US dollar.

The concept of risky assets is very ambiguous and has no clear definition. The status of risky assets is taken by those assets that are under pressure against the background of increasing risks. These may include both the US dollar and other assets under pressure from risks, which, in turn, are often caused by fundamental factors.

In fact, the S&P 500 index can serve as a leading indicator indicating a decline in the US dollar. During periods of uncertainty, the US dollar and the S&P 500 index have a very high direct correlation.

Since the beginning of 2018, the US dollar and the S&P 500 index retain a high direct correlation. It can be seen clearly in the dynamics of the US dollar and in currencies such as the euro and the Japanese yen.

Chart: Japanese candlesticks – S&P 500 index, blue line – USD/JPY, red line – USD/EUR (EUR/USD pair is taken in reverse for better visibility)

 

At the same time, it is worth noting that both the index and these pairs in recent months are in a downtrend. In the oversold conditions of the S&P 500 index and the cycles theory, we can expect a correction, which will also have a positive effect on the US dollar and the mentioned currency pairs.

At the same time, it is worth noting that the USD/JPY pair has a more significant potential for correction, in contrast to USD/EUR pair (USD/EUR is a reverse reflection of the EUR/USD pair).

Anton Hanzenko