17 June 2010

Determining Value

"Stocks abound amid grim data" (MSN). Why ? Well, because Euro continued its rebound (the doji turned into the hammer, for now). As I suggested revaluation of Euro upwards = equity up. So more and more forex rules the equity market. What will change this ? Either a strong recovery or interest rates rising (needs a strong recovery).

But will Euro continue its bounce. If the are more euro shocks, Euro may be revalued downwards. There is strong support under it right now. The technical issue, which is so important in forex is getting under that support.

It is possible, as that spike under the hammer could be a probe. Valuation probes are common in forex, they pave the way for a revaluation to that point and beyond. It would take a lot though for Euro to fall under that support.

When one analyses forex markets one must consider all possibilities. The moment one makes a trade, one goes with that decision. One must be aware of what can happen to to Euro on its long term chart. This can help you manage the risk factor, even on shorter term charts.

Right now the risk factor is counter to the trend. It is the risk of that hammer being a probe downwards. The Euro may continue its journey upwards, this may be a big reversal, but it may not.

In equity investing, one does not need to consider the risk factor like this ? But one should, and in the same way. The risk factor here is companies balance sheets being obscured in some way.

This has been the source of those huge revaluation shocks which have put the forex and equity market together (financial companies were booking revenue based at some level on debt, tech companies booking future revenue). Something has to value, and the forex market does it.

If company balance sheets are obscured by:

*revenue issues


*floods of cash determining share value

How do you determine value ? One cannot but the forex market can and will, producing the range. But the forex market is itself subject to valuation externally from the fiscal state of a country, interest rate policies and money flows (into JPY when there is equity market panic).

Remember these are being obscured as well. So it's a lack of clarity which is driving these extraordinary valuations. A strong recovery will restore clarity, one knows what revenue increases do, they grow equity, which grows share price over time, which supports currencies, but in complex ways.

But what does refusing to raise rates and flat revenue actually do ? It leaves valuation to the forex market.

© 2010 Guy Barry - All Rights Reserved.