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Renowned chartist John Murphy talks about the relationships between various global markets, commodities, and currencies.

We're talking global markets with John Murphy. John, it seems like things are constantly happening, and we're always hearing about Europe in the news. We've sort of lost sight of South America to a certain extent. China has slowed down a little bit. Japan is crawling back and seems to have a pretty good short-term rally here. How do you see the world at this point?

Well, first of all, it's important to recognize that you have to know what's going on in foreign markets, because they definitely impact on what's going on here. Over the last year, most of the problems have been in Europe, and that has weighed on our market. You'll notice that in any given day when we get bad news out of Spain or something, it affects our market.

So if you went to look at a chart of the EAFE Index, which is the index of foreign developed markets, and overlay that on the US market, there is a correlation of 96%.

Wow.

So there's a very strong correlation that most don't realize.

The world has become smaller.

In fact, just over the summer. Just as-I'm basically a chartist, so I'm talking from that perspective-if you were to look at the EAFE Index, which is Europe, Australasia, and the Far East that came down, it was testing the low that was set about a year ago. That's a very, very critical support level. If that low had broken, I think that would have had very negative implications for our market.

Fortunately, it turned up. Part of the reason it turned up, or the main reason it turned up, was because of support for the euro, and the euro has rallied quite strongly.

So the euro plays a very important role here. When the euro is weak, that causes problems in Europe. Over the last quarter, what we've seen is a nice rally in the euro that coincides with weakness in the US dollar. We're seeing European markets, in fact foreign markets have outperformed the US market over the last three months, so that's an encouraging sign. From an American standpoint, it's very important to watch those things.

Another thing is China. China had been the world leader up until the last year or two. Right now, it's probably the weakest market in the world, so I watch the Chinese stock market very closely.

One area that's very affected by China is commodity markets because China is the biggest importer of global commodities. Another is Brazil. Brazil is the world's biggest exporter or one of the world's biggest exporter.

Right. Soybeans, agriculture as well.

Exactly, so if you are a commodity trader you have to know what's going on in Brazil, you have to know what's going on in China. They are coming back, but they're lagging behind a little bit. Russia is also very much tied to the oil market.

So again, you have to keep an eye. And also currencies play a big role-like I said, the US dollar. Here's another thing. The US dollar plays a very important role in determining whether you want to put your assets in US or foreign stocks. When the US dollar is weak, foreign stocks tend to do better.

Over the last year, the dollar has been strong and US stocks have done a little better. Over the last quarter, as the dollar has started to roll over a little bit, money is flowing into foreign stocks.

This is a part of intermarket analysis, which is something I do. So if you're trying to decide whether you should be in US or foreign stocks, the direction of the US dollar plays a very, very important role. All of these things have to be taken into consideration.

Now does that trend last for a while, or is it really just watching what the dollar is doing vs. the euro, too?

No, this has been the case. If you go back over the last ten years or so, for example, and you were to compare foreign stocks to US stocks, foreign stocks have done much, much better than US stocks over the last decade, and that's because we had a very weak dollar. Over the last three or four years, where the dollar has been more stable, the US market has done a little better.

So this is a long-term thing. You really have to keep an eye on what the dollar is doing.

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