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.