Intermarket Analysis: Connected Markets 🌐
Pro Insight
No market trades in isolation - understanding market relationships gives you a complete trading edge! 🎯
Market Relationships
Understanding how different markets interact is crucial for making informed trading decisions. The four major market pillars—stocks, bonds, commodities, and currencies—are interconnected. Changes in one can influence the others, often in predictable ways.
| Market 1 | Market 2 | Correlation |
|---|---|---|
| Stocks | Bonds | -0.7 |
| Stocks | Commodities | 0.6 |
| Stocks | Currencies | -0.3 |
| Bonds | Commodities | -0.5 |
| Bonds | Currencies | 0.4 |
| Commodities | Currencies | -0.8 |
Explanation:
- A negative correlation between stocks and bonds suggests that when stock prices rise, bond prices tend to fall, and vice versa.
- A positive correlation between stocks and commodities indicates that they often move in the same direction.
- Understanding these correlations helps traders anticipate market movements and adjust their strategies accordingly.
Currency Correlations
Currency pairs often exhibit strong correlations with each other and with other asset classes. Monitoring these relationships can provide insights into market sentiment and potential price movements.
Major Pairs Relationships
| Currency Pair | Correlation | Example Movement | Typical Impact |
|---|---|---|---|
| EUR/USD vs USD/CHF | -0.95 | EUR/USD ⬆️ 1% | USD/CHF ⬇️ 0.9% |
| AUD/USD vs NZD/USD | +0.85 | AUD/USD ⬆️ 1% | NZD/USD ⬆️ 0.8% |
| USD/CAD vs Oil | -0.75 | Oil ⬆️ 1% | USD/CAD ⬇️ 0.5% |
| AUD/USD vs Gold | +0.65 | Gold ⬆️ 1% | AUD/USD ⬆️ 0.4% |
| EUR/USD vs GBP/USD | +0.80 | EUR/USD ⬆️ 1% | GBP/USD ⬆️ 0.7% |
Recent EUR/USD Performance
| Date | EUR/USD | USD Index | ECB Rate | Fed Rate |
|---|---|---|---|---|
| 2024-01-05 | 1.0945 | 102.41 | 4.50% | 5.50% |
| 2024-01-04 | 1.0955 | 102.35 | 4.50% | 5.50% |
| 2024-01-03 | 1.0925 | 102.45 | 4.50% | 5.50% |
| 2024-01-02 | 1.0940 | 102.20 | 4.50% | 5.50% |
| 2024-01-01 | 1.0980 | 101.95 | 4.50% | 5.50% |
Key Currency Correlations
-
Strong Negative Correlations (-0.7 to -1.0)
- EUR/USD vs USD/CHF: Almost perfect negative correlation
- USD/CAD vs Crude Oil: Strong commodity influence
- USD/JPY vs Gold: Safe-haven relationship
-
Strong Positive Correlations (0.7 to 1.0)
- AUD/USD vs NZD/USD: Regional economic ties
- EUR/USD vs GBP/USD: European market connection
- AUD/USD vs Copper: Commodity currency relationship
-
Moderate Correlations (0.3 to 0.7)
- EUR/USD vs Gold: Indirect relationship
- USD/CAD vs S&P 500: North American economic link
- AUD/USD vs China economic data: Asian market influence
Trading Implications:
- Use correlations to confirm trade signals
- Watch for correlation breakdowns as potential trading opportunities
- Consider correlation-based hedging strategies
- Monitor central bank policy divergences that might affect correlations
Important Notes
- Correlations can change during market stress
- Major economic events can temporarily break usual correlations
- Always confirm correlations with recent data
- Consider multiple timeframes when analyzing correlations
Commodity Relationships
Commodities like gold and oil have significant impacts on currency values and other markets. Understanding these relationships can help traders predict market trends.
Gold vs Dollar Index
| Date | Gold (USD/oz) | DXY Index | Relationship |
|---|---|---|---|
| 2023-12-01 | 2,072.50 | 103.28 | ↔️ Inverse |
| 2023-12-08 | 2,014.30 | 104.02 | ↔️ Inverse |
| 2023-12-15 | 2,035.70 | 102.56 | ↔️ Inverse |
| 2023-12-22 | 2,052.40 | 101.75 | ↔️ Inverse |
| 2023-12-29 | 2,062.80 | 101.33 | ↔️ Inverse |
| 2024-01-05 | 2,045.90 | 102.41 | ↔️ Inverse |
Key Observations:
- When DXY (Dollar Index) weakens, gold typically strengthens
- A 1% drop in DXY often correlates with a 1-2% rise in gold prices
- Major support/resistance levels:
- Gold: $2,000 (support), $2,075 (resistance)
- DXY: 101.00 (support), 104.00 (resistance)
Bond Market Impact
The bond market, particularly government bond yields, can have a profound impact on stock prices and other asset classes.
Yields vs Stocks
| Date | S&P 500 | 10Y Yield (%) | Relationship |
|---|---|---|---|
| 2023-12-01 | 4,594.63 | 4.21 | ↔️ Inverse |
| 2023-12-08 | 4,604.37 | 4.23 | ↔️ Inverse |
| 2023-12-15 | 4,719.19 | 3.91 | ↔️ Inverse |
| 2023-12-22 | 4,754.63 | 3.89 | ↔️ Inverse |
| 2023-12-29 | 4,769.83 | 3.88 | ↔️ Inverse |
| 2024-01-05 | 4,697.24 | 4.05 | ↔️ Inverse |
Key Observations:
- When 10Y yields fall, stocks typically rise (Dec 15-29 period)
- Rising yields often pressure stock valuations (early Jan)
- Critical yield levels that impact stocks:
- Below 3.5%: Generally supportive of stocks
- Above 4.5%: Often creates headwinds
- 4.0-4.5%: Neutral zone
- Market sensitivity increases when yields move rapidly
Key Relationships
- Rising yields = Pressure on stocks: Higher yields can make bonds more attractive than stocks, leading to a decline in stock prices.
- Dollar strength = Commodity weakness: A strong dollar can make commodities more expensive for foreign buyers, reducing demand.
- Risk-on = Yen weakness: In risk-on environments, investors tend to sell safe-haven currencies like the yen.
- Risk-off = Gold strength: In risk-off scenarios, investors flock to safe-haven assets like gold.
Market Cycles
Market cycles reflect the broader economic environment and can influence asset performance. Understanding these cycles helps traders align their strategies with prevailing economic conditions.
Economic Cycle Phases
| Phase | Stocks | Bonds | Commodities | USD |
|---|---|---|---|---|
| Recovery | 🟢 ⬆️ | 🔴 ⬇️ | 🟢 ⬆️ | 🔴 ⬇️ |
| Growth | 🟢 ⬆️ | 🔴 ⬇️ | 🟢 ⬆️ | 🔴 ⬇️ |
| Peak | 🔴 ⬇️ | 🟢 ⬆️ | 🟢 ⬆️ | 🟢 ⬆️ |
| Recession | 🔴 ⬇️ | 🟢 ⬆️ | 🔴 ⬇️ | 🟢 ⬆️ |
Legend:
- 🟢 ⬆️ = Bullish/Upward trend
- 🔴 ⬇️ = Bearish/Downward trend
Explanation:
- During recovery and growth phases, stocks and commodities typically perform well, while bonds and the USD may weaken.
- In peak and recession phases, bonds and the USD often strengthen as investors seek safety.
Trading Strategy
1. Correlation Analysis
- Monitor relationships: Regularly check how different markets are interacting.
- Note divergences: Identify when markets deviate from their usual correlations.
- Track changes: Keep a record of how correlations evolve over time.
- Update correlations: Adjust your trading strategy based on the latest correlation data.
2. Risk Management
- Avoid correlated exposure: Diversify to reduce risk.
- Balance portfolio: Ensure a mix of assets to mitigate potential losses.
- Hedge positions: Use derivatives or other instruments to protect against adverse movements.
- Manage risk: Continuously assess and adjust your risk exposure.
3. Entry Confirmation
- Multiple market signals: Look for confirmation across different markets before entering a trade.
- Correlation confirmation: Ensure that correlations support your trade idea.
- Volume analysis: Check trading volumes for additional confirmation.
- Trend alignment: Align your trades with prevailing market trends.
Advanced Concepts
1. Global Market Hours
- Asian session: Understand the impact of Asian markets on global trading.
- European session: Monitor European market movements and their influence.
- US session: Track US market activity and its global implications.
- Overlaps: Pay attention to periods when multiple markets are open, as they often see increased volatility.
2. Risk Sentiment
- Risk-on indicators: Identify signals that suggest a risk-on environment.
- Risk-off indicators: Recognize signs of a risk-off market.
- Sentiment shifts: Be aware of changes in market sentiment.
- Market psychology: Understand the psychological factors driving market movements.
3. Cross-Asset Flows
- Capital movement: Track the flow of capital between different asset classes.
- Sector rotation: Observe shifts in investment focus between sectors.
- Safe haven flows: Identify movements into safe-haven assets during market uncertainty.
- Carry trades: Monitor the impact of carry trades on currency markets.
Key Success Factors
- Monitor correlations
- Track relationship changes
- Note divergences
- Consider global context
- Watch capital flows
Practice Exercises
-
Correlation Tracking
- Monitor key pairs
- Note relationship changes
- Document divergences
- Track success rates
-
Market Analysis
- Review multiple markets
- Note interactions
- Track leading indicators
- Document patterns
Risk Management
Important Rules
❌ Don't over-correlate ❌ Watch correlation changes ❌ Avoid concentration ❌ Monitor exposure
Daily Routine
-
Global Market Review
- Check all major markets
- Note key relationships
- Track correlations
- Plan strategy
-
Trade Management
- Monitor positions
- Check correlations
- Adjust exposure
- Update hedges
Pro Trading Tip
The strongest trades come when multiple markets align to confirm your analysis! 🎯
Advanced Analysis
1. Leading Indicators
- Copper prices: Often seen as a barometer for global economic health.
- Transport indices: Reflect the demand for goods and services.
- High yield spreads: Indicate the level of risk in the credit markets.
- Baltic Dry Index: Measures shipping costs and is a leading indicator of economic activity.
2. Market Themes
- Risk sentiment: Understand the prevailing risk appetite in the market.
- Growth outlook: Assess the economic growth prospects.
- Inflation trends: Monitor inflation data and its impact on markets.
- Policy changes: Stay informed about central bank policies and government regulations.
3. Flow Analysis
- Fund flows: Track where money is moving in and out of.
- Options activity: Analyze options markets for insights into future price movements.
- Futures positioning: Monitor futures markets for trader sentiment.
- Currency flows: Observe currency movements to gauge market sentiment.
Remember
Markets are interconnected - what happens in one market affects all others! 🌐