Skip to main content
Version: v1 (Archived)

Trading with Intermarket Analysis - John J. Murphy

Trader @surferbb adds "Trading with Intermarket Analysis" by John J. Murphy to the library adding "it's great for referencing".

Understanding Intermarket Analysis​

Murphy teaches traders how different financial markets influence each other:

  • Market Relationships:

Stocks, bonds, currencies, and commodities don't move independently. Recognize how changes in one market ripple through others.

  • Global Perspective:

Always keep a global view. Economic shifts abroad can significantly impact domestic markets.

  • Correlation Identification:

Identify and track key intermarket correlations (e.g., bonds and stocks, dollar and commodities) to forecast market moves.

Key Market Relationships Explained​

Murphy clearly outlines major intermarket relationships:

  • Stocks & Bonds:

Falling bond prices (rising yields) often precede downturns in stocks, while rising bond prices (falling yields) generally support equities.

  • Commodities & Bonds:

Rising commodities (inflationary pressures) typically lead to falling bond prices, while falling commodities (deflationary pressures) support higher bond prices.

  • Dollar & Commodities:

A weaker U.S. dollar generally boosts commodity prices; a stronger dollar typically depresses commodity values.

  • Currencies & Equities:

Currency movements affect export-dependent stocks. A weak currency can boost exports (benefiting stocks), while a strong currency can hurt exports.

Practical Tools for Intermarket Analysis​

Murphy recommends specific tools traders should use:

  • Ratio Charts:

Compare markets visually by plotting ratios (e.g., stocks-to-bonds, gold-to-dollar). Trends in these ratios indicate market shifts.

  • Correlation Analysis:

Regularly measure correlations between asset classes to confirm or challenge your market views. Changes in correlation can signal important market turns.

  • Economic Indicators:

Follow key economic data (interest rates, inflation, GDP growth) to anticipate intermarket shifts and their impact on trading strategies.

Spotting Early Market Signals​

Intermarket analysis helps traders identify market moves before they fully emerge:

  • Bond Market as Leading Indicator:

Bond yields often signal economic strength or weakness ahead of stocks. Pay close attention to significant bond-market shifts.

  • Commodity Price Movements:

Commodity price spikes or collapses can precede inflationary or deflationary market cycles, directly impacting equities and bonds.

  • Currency Trends:

Currency strength or weakness can predict shifts in corporate profits and global capital flows, often leading equity markets by weeks or months.

Intermarket Trading Strategies​

Murphy outlines specific trading tactics leveraging intermarket analysis:

  • Confirmation Trading:

Trade confidently when multiple markets confirm the same direction. For example, stocks rising along with bond prices often signals sustainable bullish trends.

  • Divergence Trading:

When markets that normally move together diverge, be alert for trend reversals. For instance, falling bond prices with rising stocks might signal vulnerability ahead for equities.

  • Relative Strength Strategies:

Use intermarket ratios (e.g., commodities vs. dollar) to pick strongest and weakest sectors or assets. Go long strength, short weakness.

Applying Intermarket Analysis in Practice​

Actionable ways to implement Murphy's teachings:

  • Daily Cross-Market Reviews:

Dedicate time each day to review multiple market charts (bonds, stocks, commodities, currencies) to spot emerging trends.

  • Build Intermarket Watchlists:

Maintain watchlists tracking key relationships (bond yields, gold prices, dollar index) as part of your daily market routine.

  • Position Portfolio for Macro Trends:

Align your trades or investments with broader macroeconomic trends identified through intermarket analysis, increasing your odds of success.

Adapting to Changing Markets​

Murphy stresses market relationships evolve:

  • Stay Flexible:

Be aware that market correlations can shift over time. What holds true in one environment might change in another. Regularly reassess correlations.

  • Continual Learning:

Markets are dynamic. Regularly update your intermarket knowledge and adjust your strategy accordingly.

  • Monitor Central Bank Policy:

Central banks influence currencies, bonds, and stocks significantly. Always keep monetary policy shifts in view to better anticipate market responses.
​

Common Pitfalls to Avoid​

Murphy warns traders against these common mistakes:

  • Ignoring Global Context:

Never analyze a market in isolation. Always consider global factors impacting intermarket relationships.

  • Overreliance on Historical Patterns:

Historical intermarket relationships provide guidance, but don't assume they always repeat exactly. Use them as helpful guides, not rigid rules.

  • Misreading Short-Term Moves:

Not every brief divergence signals a lasting shift. Confirm signals across multiple markets before acting decisively.

​

Traders who find these insights valuable will benefit from the deeper case studies, detailed explanations, and comprehensive practical examples contained within Murphy's full book.

Last updated on