|  MAY 1992

The Link Between Bonds And Commodities by John J. Murphy

The Link Between Bonds And Commodities by John J. Murphy Like a set of tumbling dominoes, intermarket analysis is based on the theory that one instrument affected will in turn affect another. Technical pioneer John Murphy, best known for his trailblazing work in technical analysis and intermarket analysis, explains how that interrelationship between bonds and commodities works. Intermarket analysis adds another layer to the work of the technician by considering activity in related markets. Whereas traditional technical analysis treats each market separately, intermarket technical analysis suggests that important directional clues can be obtained in one market by studying what is happening in related markets. The stock market and the U.S. dollar, for example, are influenced by the direction of interest rates. The direction of interest rates, in turn, is influenced by the direction of commodity prices, and so on. Commodity prices and bond prices usually trend in opposite directions; bond yields trend in the same direction as commodities. Thus, commodities and bonds should be viewed together. Analysis of either sector is incomplete without analysis of the other. Figure 1 shows the Commodity Research Bureau (CRB) Futures Price Index, a basket of 21 commodities, and bond yields generally trended in the same direction from 1988 to February 1992. At year-end 1991, the drop in bond yields to new lows was not confirmed by the CRB Index, which held above its mid-1991 trough; that divergence was followed by a rebound in both measures.

by John J. Murphy