Intermarket analysis studies relationships between different asset classes. Understanding how stocks, bonds, commodities, and currencies interact provides valuable trading context.
What is Intermarket Analysis?
Definition
Intermarket Analysis:
- Study of market relationships
- How assets affect each other
- Cross-market correlations
- Macro perspective
Purpose
Benefits:
- Better market context
- Early warning signals
- Confirmation of trends
- Broader perspective
The Four Major Markets
Stocks
Characteristics:
- Equity markets
- Economic growth proxy
- Risk-on asset
- S&P 500, indices
Bonds
Characteristics:
- Fixed income
- Interest rate sensitive
- Safe haven (often)
- Treasury yields
Commodities
Characteristics:
- Raw materials
- Inflation indicators
- Gold, oil, metals
- Supply/demand driven
Currencies
Characteristics:
- Foreign exchange
- Relative value
- Interest rate differentials
- Economic indicators
Key Relationships
Stocks and Bonds
Traditional Relationship:
- Inverse correlation (often)
- Risk-on: Stocks up, bonds down
- Risk-off: Bonds up, stocks down
When Correlation Changes:
- Crisis periods
- Fed intervention
- Inflation fears
Bonds and Commodities
Typical Relationship:
- Rising commodities = inflation concern
- Inflation = bonds fall (yields rise)
- Inverse relationship
Dollar and Commodities
Key Relationship:
- Dollar up = commodities down
- Dollar down = commodities up
- Inverse correlation
- Commodities priced in dollars
Gold and Dollar
Classic Relationship:
- Inverse correlation
- Dollar weak = gold strong
- Safe haven competition
Stocks and Dollar
Variable Relationship:
- Depends on context
- Strong economy = both up possible
- Risk-off = dollar up, stocks down
Intermarket Signals
Risk-On Environment
Characteristics:
- Stocks rising
- Bonds falling
- Commodity currencies strong
- Safe havens weak
Trading Implication: Favor risk assets, growth trades
Risk-Off Environment
Characteristics:
- Stocks falling
- Bonds rising
- Safe haven currencies strong
- Commodities weak (often)
Trading Implication: Favor defensive assets, caution
Inflationary Environment
Characteristics:
- Commodities rising
- Bonds falling
- Gold strong
- Stocks variable
Trading Implication: Inflation hedges, commodity exposure
Deflationary Environment
Characteristics:
- Commodities falling
- Bonds rising (prices)
- Dollar often strong
- Stocks weak
Trading Implication: Defensive positions, cash
Using Intermarket Analysis
Confirmation
Method:
- Your analysis suggests X
- Check other markets
- Do they confirm?
- Useful context if aligned; it does not change your position size
Divergence Warning
Method:
- Markets usually correlated
- Correlation breaks down
- Warning signal
- Something may shift
Leading Indicators
Some Markets Lead:
- Bonds often lead stocks
- Copper leads economy
- Credit markets lead equity
Sector and Commodity Links
Energy Sector
Correlation:
- Energy stocks follow oil
- Higher oil = energy stocks up
- Strong relationship
Gold Miners
Correlation:
- Follow gold prices
- Often with leverage
- Gold up = miners up more
Financials
Correlation:
- Benefit from rising rates
- Yield curve matters
- Bond market important
Materials
Correlation:
- Follow commodity prices
- Industrial metals important
- China demand matters
Currency Correlations
AUD and Commodities
Relationship:
- Australia exports commodities
- AUD rises with commodity prices
- Risk-on currency
CAD and Oil
Relationship:
- Canada exports oil
- CAD correlates with oil
- Strong linkage
JPY as Safe Haven
Relationship:
- Risk-off = JPY strength
- Risk-on = JPY weakness
- Flight to safety proxy
USD Reserve Status
Relationship:
- Crisis = USD demand
- Global trade currency
- Complex relationships
Practical Application
Step 1: Monitor Multiple Markets
Watch:
- Stock indices
- Bond yields
- Dollar index
- Gold
- Oil
Step 2: Note Correlations
Track:
- Normal relationships
- When they change
- Direction of moves
Step 3: Identify Regime
Determine:
- Risk-on or risk-off?
- Inflationary or deflationary?
- What's the theme?
Step 4: Apply to Trading
Use:
- Confirm your thesis
- Warning signs
- Sector selection
- Correlated-exposure checks (size stays at 1% risk per trade)
Intermarket Warnings
Divergences
Watch For:
- Stocks up, bonds up = unusual
- Gold up, dollar up = stress
- Correlations breaking = caution
Credit Spreads
Monitor:
- Widening = risk-off
- Narrowing = risk-on
- Early warning system
Volatility
Check:
- VIX rising = concern
- Cross-asset volatility
- Risk environment
Limitations
Correlations Change
Reality:
- Relationships aren't constant
- Regime shifts occur
- Don't assume permanence
Complexity
Challenge:
- Many moving parts
- Hard to isolate factors
- Can be overwhelming
Not Timing Tools
Reality:
- Context, not precise timing
- Confirming, not predicting
- Part of analysis, not all
Common Mistakes
Over-Relying on Correlations
Mistake: Assuming correlations always hold
Solution: Check if relationship is intact
Ignoring Intermarket
Mistake: Trading in isolation
Solution: Consider broader context
Too Complex
Mistake: Tracking too many relationships
Solution: Focus on key relationships
Key Takeaways
- Four main markets: stocks, bonds, commodities, currencies
- Markets influence each other
- Dollar typically inverse to commodities
- Risk-on/risk-off frameworks help
- Divergences can be warning signs
- Correlations change over time
- Use for context, not precise timing
- Part of complete analysis toolkit
What's Next?
Learn about building and backtesting trading systems.
This article is for educational purposes only and does not constitute financial advice.