Intermarket analysis is a powerful approach that helps traders understand the relationships between different asset classes, including stocks, commodities, currencies, and bonds. By analyzing how these markets interact, traders can make more informed decisions and improve their trading strategies.
In this article, we will explore the key principles of intermarket analysis, how different asset classes influence each other, and how traders can use this knowledge to anticipate market movements.
What Is Intermarket Analysis?
Intermarket analysis examines the correlations between different financial markets. Instead of analyzing a single asset in isolation, traders look at how stocks, commodities, bonds, and currencies move in relation to one another.
By studying these relationships, traders can identify trends, confirm signals, and make better predictions about price movements. This approach is particularly useful for traders who operate in multiple markets, as it provides a broader perspective on global financial conditions.
The Four Major Asset Classes in Intermarket Analysis
There are four primary markets that traders monitor in intermarket analysis:
- Stocks (Equities) – Represent ownership in companies and reflect overall economic growth and investor sentiment.
- Commodities – Include oil, gold, and agricultural products, which are influenced by supply and demand dynamics.
- Currencies (Forex) – Represent the value of one currency against another and are affected by interest rates, central bank policies, and global trade flows.
- Bonds (Fixed Income) – Represent government and corporate debt, which move inversely to interest rates and influence risk sentiment.
Understanding how these markets interact can help traders make more accurate forecasts and spot trading opportunities before they become obvious.
Key Relationships in Intermarket Analysis
1. Stocks vs. Bonds
One of the most important relationships in financial markets is between stocks and bonds. Generally, these two asset classes have an inverse relationship.
- When stocks are rising, investors tend to move away from bonds because they are seeking higher returns in equities.
- When stocks decline, investors often shift money into bonds as a safe-haven investment, driving bond prices up and yields down.
However, there are times when both stocks and bonds rise together, such as during periods of strong economic growth with low inflation. Conversely, if inflation rises too quickly, both asset classes may fall together, as higher interest rates hurt both bond prices and stock valuations.
2. Stocks vs. Commodities
The relationship between stocks and commodities can provide insight into inflationary trends and economic cycles.
- Rising commodity prices often signal inflationary pressures, which can hurt corporate profits and slow stock market growth.
- Falling commodity prices can indicate economic weakness, as lower demand for raw materials suggests slowing industrial activity.
Commodity-sensitive stocks, such as energy and mining companies, tend to perform well when commodity prices rise. Conversely, industries that rely on raw materials, like manufacturing and consumer goods, may struggle when commodity prices are high.
3. Commodities vs. Currencies
Commodities and currencies are closely linked, especially for nations that rely heavily on commodity exports. The value of a country’s currency is often influenced by commodity prices.
- The Canadian dollar (CAD) is highly correlated with oil prices because Canada is a major oil exporter.
- The Australian dollar (AUD) moves in relation to gold and other minerals, as Australia is rich in natural resources.
- The U.S. dollar (USD) often has an inverse relationship with commodity prices, as most commodities are priced in dollars. When the dollar strengthens, commodity prices tend to fall, and vice versa.
Traders who monitor these relationships can use currency movements to anticipate changes in commodity prices and vice versa.
4. Bonds vs. Commodities
The relationship between bonds and commodities is largely driven by inflation and interest rates.
- Rising commodity prices (especially oil and gold) often signal inflation, leading central banks to raise interest rates. Higher interest rates cause bond prices to fall.
- Falling commodity prices indicate lower inflationary pressures, which can lead to lower interest rates and rising bond prices.
Traders who follow this relationship can anticipate bond market moves based on commodity price trends.
How Traders Can Use Intermarket Analysis
Intermarket analysis can be applied in several ways to improve trading decisions. Here are some strategies traders can use:
1. Confirming Trends
One of the biggest advantages of intermarket analysis is that it helps confirm market trends. If multiple asset classes align, it strengthens the conviction of a trade.
For example:
- If stock markets are rising while bond yields are also climbing, this confirms that investors have confidence in economic growth.
- If gold prices are rising while the U.S. dollar is falling, it could indicate increasing inflation fears, confirming a bearish outlook for bonds.
Using multiple asset classes to validate a trade reduces the likelihood of false signals and increases the probability of success.
2. Spotting Early Warning Signals
Changes in one market can often foreshadow movements in another. By paying attention to intermarket relationships, traders can anticipate market shifts before they happen.
For example:
- A sharp rise in bond yields could signal trouble for stock markets, as higher interest rates make borrowing more expensive for businesses.
- A sudden drop in oil prices might indicate weakening global demand, which could negatively affect stock indices and commodity-linked currencies.
By analyzing these relationships, traders can take proactive positions before the broader market reacts.
3. Pair Trading Across Asset Classes
Intermarket analysis can also be used for pair trading strategies, where traders take long and short positions in related assets.
Some examples of intermarket pair trades:
- Long gold, short USD (when inflation expectations rise).
- Long energy stocks, short industrial stocks (when oil prices rise).
- Long emerging market currencies, short U.S. dollar (when risk sentiment improves).
These strategies allow traders to profit from relative movements between asset classes while reducing directional risk.
Challenges of Intermarket Analysis
While intermarket analysis is a valuable tool, it is not always straightforward. Relationships between asset classes can change depending on economic conditions, central bank policies, and market sentiment.
Some potential challenges include:
- Temporary Correlation Breakdowns: Relationships between asset classes are not always consistent and may shift due to external factors.
- Unexpected Policy Interventions: Central banks and governments can influence markets through interest rate changes, fiscal policies, and currency interventions.
- Geopolitical Events: Wars, trade disputes, and other geopolitical risks can disrupt traditional market correlations.
Traders should use intermarket analysis as a guiding tool rather than a rigid rule and always combine it with other forms of technical and fundamental analysis.
Conclusion:
Intermarket analysis is a crucial tool for traders who want a deeper understanding of market relationships. By analyzing the interactions between stocks, bonds, commodities, and currencies, traders can anticipate trends, confirm signals, and make better-informed trading decisions.
Successful traders know that no market exists in isolation. By incorporating intermarket analysis into their strategies, they gain a more comprehensive view of global financial markets and improve their ability to navigate complex trading environments.
