What Is Intermarket Analysis Saying About Markets?

04/20/12 09:26:43 AM

by Matt Blackman

As many traders and investors were forced to relearn in the last financial crisis, no asset class is an island onto itself. Where one goes, the others are sure to take notice. Intermarket analysis says that stocks, bonds, commodities, and currencies all exert pressure on one another. So what are commodities and bonds telling us about where stocks are headed?

Security: SPY, DIA, TLT
Position: N/A

In my last TCA article "Bearish Omen For US Stocks?," I discussed the head & shoulders top patterns on the commodity-rich Toronto Stock Exchange index (TSX) and the Standard & Poor's 500 and their implications for stock and commodity markets. One premise of intermarket analysis is that bonds, stocks, and commodities move together, with bonds moving first, followed by stocks, then commodities pulling up the rear. Although this order is not always fixed, when one group of assets moves in one direction for a period of time, it generally exerts a gravitational pull on the others.

FIGURE 1: TLT, DAILY. This chart for year-to-date 2012 shows how these assets have performed. Are bonds leading the market?

Graphic provided by: FreeStockCharts.com.

As we see in Figure 1, bonds have been the poorest performing of the three assets year to date, while US stocks have been the clear winner. Commodities as represented by the Commodity Research Bureau (CRB) index (and the TSX) are basically flat.

FIGURE 2: TLT, WEEKLY. This chart back to March 2009 shows that although bonds have been the worst performing of the four indexes, only the SPX remains above its 2011 highs.

Graphic provided by: FreeStockCharts.com.

Over the long haul since the beginning of the stock rally in 2009, the picture is somewhat different. As we see in Figure 2, all have experienced rallies of some sort but as we see, only the S&P 500 remains above its 2011 highs.

Although there is a chance that stocks are leading the other markets higher, given that stocks are alone, the probability of this occurring must be considered lower than the other way around.

However, this is not the time to throw caution aside and go short. We are in a Presidential election year, and the Fed and government have a predictable habit of cranking up stimulus pumps. Watch the Federal Reserve balance sheet for further signs of expansion (http://goo.gl/9nhLW ). It would therefore be unwise to rule out the chance of this factor, lifting stocks and commodities higher toward year-end.

Until there are reliable indications that more stimulus is under way, commodities and bonds are trending lower. In lieu of new evidence, this trend should remain in force and stocks should follow suit.

Matt Blackman

Matt Blackman is a full-time technical and financial writer and trader. He produces corporate and financial newsletters, and assists clients in getting published in the mainstream media. He is the host of TradeSystemGuru.com. Matt has earned the Chartered Market Technician (CMT) designation. Find out what stocks and futures Matt is watching on Twitter at www.twitter.com/RatioTrade

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What Is Intermarket Analysis Saying About Markets?

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