Intermarket analysis

You can describe the classic relationships between stocks, bonds, commodities and the dollar, and explain why they shift with the economic environment.

No market moves alone

Interest rates rise, and shares fall. The dollar strengthens, and commodities weaken. Bond prices jump, and the stock market wobbles. Markets constantly push and pull on each other.

Intermarket analysis tries to read these links. It can explain moves that look strange on a single chart. It can also mislead, because the links themselves change over time.

Links that shift

Intermarket analysis compares four major asset classes, stocks, bonds, commodities and currencies, to understand how they influence each other. It was popularized by John Murphy, whose work StockCharts summarizes in its guide.

Classic relationships described there, for what Murphy calls a normal inflationary environment:

Dollar and commodities: inverse. Most commodities are priced in dollars, as the commodities chapter showed, so a stronger dollar tends to weigh on their prices.
Bonds and commodities: inverse. Rising commodity prices signal inflation, which tends to push bond yields up and bond prices down.
Bonds and stocks: positive, with bonds often turning first. Falling interest rates, meaning rising bond prices, tend to support shares.

The crucial point is that these relationships depend on the environment. Murphy describes a shift from inflationary to deflationary forces around 1998, starting with the Asian currency crisis. Fears of deflation pushed money out of shares and into bonds: shares fell while Treasury bonds rose, and the two decoupled for many years.

This connects to the lesson on correlation in the risk chapter: correlations are measured on the past and can change, sometimes quickly when conditions change. Intermarket links are context for reading a chart, not rules for trading it.

Look for the driver

A fictional trader watches gold. Over two weeks, the US dollar index rises strongly and gold falls.

Classic reading: the inverse dollar-commodity link at work. A stronger dollar makes gold more expensive for buyers in other currencies.
Better question: what drove both? If rising US interest rate expectations lifted the dollar, they also raised the cost of holding gold, which pays no interest. The link may reflect one common driver rather than one market causing the other.
Check: the trader looks at bond yields too. If yields rose sharply, the common driver is likely, and the relationship could change when rate expectations change.

Intermarket analysis is most useful as a second view. It can tell you that a move in your market fits the bigger picture, or that it does not, which is worth noticing.

Common mistakes

Treating links as fixed laws. They change with inflation, growth and policy.
Confusing correlation with cause. A common driver can move both markets.
Using too short a window. Correlations over a few days are mostly noise.
Trading one market off another without a plan. A link is context, not an entry signal.

The takeaway

Intermarket analysis compares stocks, bonds, commodities and the dollar. Their links are real, but they change.

Check yourself

Quick quiz

4 questions. Instant feedback, nothing is saved.

1Tap the relationship that changed with the economic environment.

Tap the chart.

John Murphy describes stocks and bonds as positively related in inflationary periods and decoupled after the shift to deflationary forces around 1998.
2Which four markets does classic intermarket analysis compare?

The idea is that these markets are linked through interest rates, inflation and growth.
3Why are commodities often inversely related to the US dollar?

As the commodities chapter showed, dollar pricing links the two. It is a tendency, not a fixed rule.
4What is the main risk in using intermarket relationships?

Murphy himself describes a regime change around 1998. Relationships are context, not laws.

of 4 correct.

Sources

StockCharts ChartSchool: Intermarket analysis (based on John Murphy)
John J. Murphy: Trading with Intermarket Analysis (book)

Back to Technical Analysis