Inter-market analysis is a branch of technical analysis that examines the correlations between four major asset classes: stocks, bonds, commodities and currencies. The relation between these can be used to identify the stage of the business cycle and improve their forecasting abilities. There are clear relationships between stocks and bonds, bonds and commodities and commodities and the dollar.
Knowing these relationships can help chartists determine the stage of investing cycle, to select the best sectors and avoid worst performing sectors.
The intermarket relationships depend on the forces of inflation or deflation. In a “normal” Inflationary environment, stocks and bonds are positively correlated. This means they both move in same direction.
In an Inflationary environment the relationships between Intermarket relationships will be like:
- A POSITIVE relationship between bonds and stocks.
- Bonds usually change direction ahead of stocks.
- An INVERSE relationship between bonds and commodities.
- An INVERSE relationship between the US Dollar and Commodities.
In an deflationary environment the relationships between Intermarket relationships will be like:
- An INVERSE relationship between bonds and stocks.
- An INVERSE relationship between bonds and commodities.
- An INVERSE relationship between the US Dollar and Commodities.
- A POSITIVE relationship between stocks and commodities.