The price of oil and bonds as they relate to market strength is a wide topic, but these are two areas tend to have a large influence over the markets. In this section, we will address the basics of using the prices of these vehicles to determine market strength.
Energy is one commodity that affects every company in one way or another. For example, the price of wheat makes a greater impact on agriculture stocks, but oil influences everything from the cost of electricity and heating, to the cost of production and transportation. When the price of commodities, and particularly oil, is on the rise it signals that inflation is starting to become apparent. The day-to-day price fluctuations won't cause inflation fears, but the long-term trend will. If the price of oil has been steadily increasing, it could cause investors to be fearful that inflating energy prices will slow company profits.
The price of oil has an opposite effect on those stocks directly influenced by the price of oil. Drilling, pipeline and retail distribution of energy stocks tend to have an extremely high correlation to the price of oil.
Ten and 30 year bonds, along with interest rate futures are another indicator used by many investors to gauge the strength of the stock market. As you may already know, if bond prices are going up, then yields are decreasing. This decrease in yields causes investors to search for other areas in which to invest their money at a higher return - this usually means the stock market. On the other end of the equation, lower bond yields means that interest rates are low and companies will find it much cheaper to borrow money and finance expansion or growth.
While bond and oil prices might not be as accurate and current as the S&P 500 futures, they are the useful when looking at the overall condition of the economy and, more importantly, at the trend of the stock market.
Next: Market Strength: Conclusion »
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