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Watch This Lockstep Relationship

Many traders and investors will often buy and sell stocks on the back of a news report or a story that was invented by their broker or some analyst. The truth of the matter is that the currency market is usually the driving force behind every stock market move. After all, what is trading all about between one nation to another. Over the past few years we have seen almost every modern nation try to devalue their currency to help increase their exports. Japan has done this most aggressively over the past year. Usually, the institutional money jumps on this trend and puts on a pair trade. In other words, the institutional traders have been selling the Japanese Yen and buying the S&P 500 Index.

Traders can easily see the lockstep relationship between the USD/JPY (U.S. Dollar vs the Japanese Yen) and the S&P 500 Index e-mini futures (ES Z3) in the chart below. Remember, when the USD/JPY rises it means that the Japanese Yen is declining. So basically, when the USD/JPY catches a bid so will the stock market indexes. On the flip side, should the USD/JPY decline so should the major stock market indexes. Right now, the action in the Japanese Yen is dominating the equity markets. I doubt you will hear this on CNBC.

Nicholas Santiago