Intermarket Analysis

Intermarket analysis studies the links between asset classes. Bond yields and equities, the dollar and commodities, credit spreads and stock indexes, crude oil and inflation expectations. John Murphy popularised a structured version for technicians. The useful core is economic, not magical. Discount rates affect the present value of equities. A currency move changes the earnings of exporters and the price of imported commodities. Credit stress shows up in the willingness to own risky assets. These links are real, unstable, and sometimes reverse for years. A rule such as "bonds up, stocks up" is a regime description that has been true in some decades and false in others. The analysis is the question "what changed in the related market," not a permanent pair trade.

Pick the relationships that have a mechanism you can say out loud. If you trade equities, know what the policy rate, the currency, and the credit spread are doing. If you trade a commodity producer, know the commodity. Watch for confirmation and for divergence, and then go back to the chart you actually trade. A stock breaking out while its sector and the commodity it sells are breaking down is a weaker breakout. It can still work. The intermarket fact is a reason to demand more confirmation or less size, not a reason to ignore the stock's own level. Write down the relationship you are using. If you cannot name the mechanism, you are collecting tickers that happened to rhyme.

Use intermarket context as a filter on the daily bias. A broad risk-off day, equities down, credit wider, defensive assets bid, is a poor day to treat a single long breakout as a swing. A confirmation, the sector, the factor, the commodity all agreeing, is a reason to trust a level trade a little more. Rebalance the filter when the regime changes. Correlations go to one in a crisis and go to zero in a quiet market, and a filter built on last year's correlation will fight you. Recheck the link with a simple chart of the two series. If the link has been absent for months, stop quoting it.

Assuming a historical correlation is a law. Also trading the implication instead of the market: shorting equities because yields rose, without a setup in equities, is a macro opinion with a stock ticket. And stacking five related markets until one of them agrees, then calling it intermarket confirmation. Pre-commit to the market that is allowed to veto you.

Correlations break at the moment you need them most, or they jump to one and diversify nothing. Intermarket analysis is slow and often late, because you are waiting for another market to confirm what yours is already doing. It does not provide a stop. A beautiful macro story with no invalidation is how traders hold a losing equity through a regime that "should" have turned. Use the related market to set expectations. Use your own chart to set the exit.