What is Intermarket analysis?

Intermarket analysis is a branch of technical analysis and it defines the correlations between four major asset classes: stocks, bonds, commodities, and currencies. In his classic book "Trading with Intermarket Analysis", John Murphy noted that traders can use charts to analyze these relationships, thereby identifying the periods of the menstrual cycle. and improve their predictability. There are correlations clear correlations occurring between stocks and bonds, bonds and commodities, commodities and dollars. Knowing these relationships can help us identify the stages of an overall cycle, choose to trade in the best markets and avoid the worst performers.

Inflation relationship

The Intermarket relationship depends on the forces of inflation or deflation. In the "normal" inflation environment, stocks and bonds are positively correlated. This means that they both move in the same direction. The world economy has been in an inflationary environment from the 1970s to the late 1990s. These are the main inter-market relationships in inflationary environments:
  • Bonds and stocks are positively correlated
  • Bonds change trend before stocks (often happens)
  • Bonds and commodities are negatively correlated.
  • The US dollar and commodity are negatively correlated.

In an inflationary environment, stocks respond positively to low-interest rates (bond prices rise). Low-interest rates stimulate economic activity and boost corporate profits.

Deflationary relationship

Murphy notes that the world moved from inflation to deflation around 1998. It started with the collapse of the Thai Baht in the summer of 1997 and quickly spread to neighboring countries, which is called the "Asian Monetary Crisis". Asian central banks have raised interest rates to support their currencies, but high-interest rates have strangled their economies and complicate matters. The threat of global deflation then pushed money away from holding stocks and into bonds. The stock market then plummeted, treasury bonds rose sharply and US interest rates fell. This marked a period of positive separation between stocks and bonds for many years. Deflation continued as the Nasdaq bubble burst in 2000, the real estate bubble burst in 2006, and the 2007 financial crisis.

The Intermarket relationships in a deflationary environment are largely identical to those in an inflationary one, except that stocks and bonds are negatively correlated in a deflationary environment. This means stocks rise when bonds fall, and vice versa. More broadly, this also means that stocks are positively related to interest rates.

Obviously, the deflationary forces change the entire dynamics of the economy. Deflation is negative for stock and commodity markets but positive for bonds. The increase in bond prices and lower interest rates increase the risk of deflation, putting downward pressure on stocks. Conversely, falling bond prices and increasing interest rates reduce the risk of deflation, which has positive implications for stocks. The following list summarizes key intermarket relationships in deflationary environments:
  • Bonds and stocks are negatively correlated.
  • Commodities and bonds are negatively correlated
  • Stocks and commodities are positively correlated
  • The US dollar and commodity are negatively correlated
Relationship between Dollars and Commodities

Although the Dollar and the currency market are part of the intermarket analysis. In intermarket analysis, a weak dollar is often accompanied by an appreciation of the commodity market. In addition, the increase in the price of goods will also cause bonds to decline. In other words, a weak Dollar is usually accompanied by a decrease in the price of a bond. The weak Dollar plays a role in stimulating the economy by making US exports more competitive. This is particularly beneficial for stocks of large multinationals with a large share of overseas revenues.

So what are the effects of a dollar appreciation? A country's currency reflects that country's economy and its balance sheet. Countries with strong economies and healthy balance sheets have stronger currencies. Countries with weak economies and a large debt burden tend to weaken their currencies. A rising dollar puts pressure on commodity prices because many commodities are denominated in dollars, such as oil. Bonds benefit from a reduction in commodity prices as this reduces inflationary pressures. Stocks can also benefit from a discount on commodities as this reduces raw material costs.

Relationship between Industrial Metals and Bonds Market

Not all goods are created equal. In the commodity market there are always special goods, like Petroleum. Oil is a commodity prone to supply shock. Unrest in oil producing countries or regions often causes oil prices to soar. An increase in price due to a supply shock is negative for share prices, but an increase in price due to increased demand can be a positive factor for share prices. The same is true for industrial metals, which are less susceptible to these supply shocks. Therefore, we can follow industrial metal prices for clues about the economy and stock market. Rising prices reflect growing demand and a healthy economy; Falling prices reflect reduced demand and a weak economy. The chart below shows a fairly clear positive relationship between industrial metals and the S&P 500 index.

Industrial metals increase as the economy is growing and when inflationary pressures are mounting. Bonds fall in these cases and rise when the economy weakens or deflationary pressure is forming. We can use the industrial metal / bond price index to see whether the strength of the economy or current environment is inflation or deflation. This ratio will increase when the economy develops and the inflationary environment dominates. Conversely, this ratio will decrease when the economy weakens and deflation prevails.


Intermarket analysis is a valuable tool for long and medium term analysis. Although these intermarket relationships are usually maintained over a long period of time, they may be lost or inactive. Major events, such as the 2008 US financial crisis, can leave some relationships in a state of ambiguity for several months. Furthermore, the techniques presented in this article should be used in conjunction with other technical analysis techniques, not just one indicator or a relationship for a comprehensive assessment of visual conditions. school.