Why DAX is the New Lead Contract
I am writing this to you from the back seat of a Toyota Land Cruiser as it winds its way over the legendary Tizi n?Tichka Pass crossing the High Atlas Mountains of Morocco.
I am fleeing the blistering 110-degree heat of the Sahara Desert on the way to the fabled thousand-year-old city of Marrakesh.
I am typing so I don?t have to endure the suspense of seeing how my driver is going to pass the lumbering truck in front of us. We have already seen one bus that has run off a cliff.
I have always been a believer of the ?lead contract? concept for trading global markets.
It always seems that traders can focus on only one market at a time. Get it right, and trading anything else is a piece of cake, a simple second or third derivative trade.
I have seen many lead contracts over the decades. During the 1970?s, everything traded tick for tick with gold (GLD). After that, oil (USO) was the main driver. During the 1990?s NASDAQ (QQQ) was the big kahuna.
Right now, the lead contract for all markets high and low is the DAX, the German stock index. Keeping a laser like focus on the DAX has enabled me to clock a 30% return for my followers so far this year, with many making much more.
It has given me such an advantage that I have even been able to phone in winning Trade Alerts from the back of a camel.
(Last year, when the Euro (FXE) was the lead contract, the Trade Alerts were sent while holding on to a rope on the face of a cliff in the Swiss Alps).
In years past, when trading floors were occupied by actual humans, one could physically feel when the herd got the scent, and all piled into the same securities at the same time, chasing the same prey.
Those days have long since passed, the traders replaced by whirring and blinking machines.
No doubt, much of this is now algorithmically driven. It only takes a news flash here, and a parallel instrument to move there, and billions of dollars pour into or out of the DAX.
Thursday, July 8, was a perfect example of how useful knowledge of the lead contract?s identity can be. The Dow Average broke its 200-day moving average months ago.
The S&P 500 (SPY) has been churning around its 200-day for weeks. But without confirmation from the DAX these moves were mere corrections within a broader long-term uptrend.
So last Thursday, when the DAX finally hit its 200-day and bounced hard, I knew the global markets were ready for a tradable rally.
The lead contract has the ability to predict the future as well. By rallying right when it did, the DAX predicted the following:
1) Europe would agree to a grand restructuring of Greek debt.
2) Iran would sign a deal with the leading powers to limit its nuclear program.
3) The emergency measures taken by the Chinese government to halt the collapse of the Chinese stock markets would succeed.
As it turns out, all three of these events unfolded, within days. Of course, I have been predicting these outcomes for months, or years. But you have to read my newsletter to know that.
So, what is the lead contract telling us will happen next?
All of the big volatility events of 2015 are now behind us. As the summer grinds on, and as the developed world finishes its summer vacations, several more attempts will be made to break the DAX 200 day moving average.
They will all fail.
That then sets up a pretty rosy picture for the rest of the year. The Greek deal will boost European GDP, especially Greece?s. The Iran agreement has already brought significantly lower oil prices, increasing growth for the world as a whole.
US economic data should soon begin to deliver a convincing turn to the upside. That paves the way for a global ?RISK ON? move.
This is why I bought the S&P 500 (SPY), Apple (AAPL), and sold short the Japanese yen (FXY), (YCS), right exactly when the lead contract, the DAX, told me to do so.
Well, I am finally coming out of the Atlas Mountains now, after passing through some extraordinary scenery. Bright red stone faces, verdant green riverbeds, mud brown medieval villages. The temperature has plunged to only 100.
Prickly pear is everywhere, providing a rich harvest of fruit for the residents, and even the century plants are blooming.
It looks like I?ll live to send out another Trade Alert.
