The chart below shows an idealized economic cycle and Intermarket relationships under normal inflationary environments. This cycle chart is referenced in "Intermarket Review" by Martin J. Pring. The economic cycle is shown as a sine wave. The first three phases are part of the economic contraction (weakening, bottoming, and consolidating). Stage 3 shows the final stage of contraction, as well as bottom formation. When the "Sin wave" crosses the centerline, the economy shifts from three stages of contraction to three stages of expansion (strengthening, peaking, and weakening). Stage 6 shows that the economy is in the final stage of expansion, starting to weaken after peaking.

Phase 1 shows that the economy is shrinking, bond prices increase when interest rates decrease. Economic weakness facilitates loosening monetary policy and lowering interest rates is implemented, which causes bonds to rise.

Phase 2 marks the bottom of the economy and the stock market. Although the recession has stopped, the economy is not yet in the stage of expansion or development. However, stocks bottom out before the economic contraction period ends.

Stage 3 shows a significant improvement in economic conditions as the economic cycle prepares to transition to an expansion period. Stocks are rising, and the commodity market is also beginning a phase of expansion by raising prices.

Stage 4 marks a phase of complete expansion. Both stocks and commodities rose, but bonds fell as the expansion increased inflationary pressures. Against this, interest rates began to rise higher.

Phase 5 marks the peak of economic growth and a sharp rise in the stock market. Although the expansion continues, the growth rate of the economy is slower due to rising interest rates and rising commodity prices causing higher operating costs. The market begins a period of contraction and peaks before the real expansion ends. Commodities are still strong and peak.

Phase 6 marks the recession of the economy as the economic cycle is about to move from expansion to contraction. Commodity prices fell due to lower demand.

Remember that this is the ideal economic cycle in an inflationary environment. Stocks and bonds rise together in phases 2 and 3. Similarly, both fall in periods 5 and 6. This won't happen in a deflationary environment when bonds and equities move. opposite.

Above is the theory, now we will do a little practical comparison:

The chart below shows the correlation between 3 main indexes: $ SPX represents the stock index, $ USB is the 30-year US bond, $ CRB is the Reuters / Jefferies commodity index.

Quite clearly, we can see that both stock and commodity markets go up while bond prices fall (The arrows show this). This allows us to see the market is in Phase 4 of the cycle chart, which means that the economy is likely to continue expanding and heading to the top.

However, this year is a special year when things are happening so quickly with the unexpected impact of the covid-19 epidemic, besides that interest rates have remained low for all periods:

Phase 1 lasted only about a month from March to the end of April and May while phase 2 was almost gone, accompanied by a mass rate cut of all central banks:

Phase 3 also lasts only 2 months from June to August when both the Bonds, the Stock market, and the Commodity market increase simultaneously:

With the temporary prediction that the market is in phase 4, we can devise the following handling strategies:
  • Stocks and Commodities markets will likely continue to rise and lead to a top, which allows us to continue to trade long positions on the US stock market, commodities such as metals, agricultural products, and industrial materials such as petroleum.
  • Focus more on the Commodity market (gold, silver, copper, platinum, agricultural products, iron, steel, oil ...) or commodity indices to prepare for phase 5.
  • Buy currencies associated with the commodity market such as AUD, NZD, and CAD for the foreign exchange market.
  • Note that this one cycle happens very quickly, so the peak formation can happen very quickly, it can last from 2-4 months for the next 2 cycles - the forecast is the end of the year. 2020 to early 2021.
  • Phase 4 does not come with a policy of raising interest rates of the Central Banks, but it does come with fiscal stimulus packages. This reinforces the fact that this cycle can happen quickly and unsustainably.
The above are 6 phases of an economic cycle in inter-market analysis and applying it to the real situation. Having a guide to long-term trading, combined with short-term chart analysis will give us the best decisions!

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