Trading Journal
Intermarket Analysis
Intermarket analysis is not a method that will give you specific buy or sell signals. However, it does provide an excellent confirmation tool for trends and will warn of potential reversals. Bond prices and stocks are generally correlated to one another. When bond prices begin to fall, stocks will eventually follow suit and head down as well. As borrowing becomes more expensive and the cost of doing business rises due to inflation, it is reasonable to assume that companies (stocks) will not do as well. Once again, we will see a lag between bond prices falling and the resulting stock market decline.
> If Bond Price ▼, Interest Rate▲ then Stock▼
Bonds are safer than stocks but offer lower return. Stocks do well when economy is booming. Sometimes, both stocks and bonds can go up in value at the same time. This happens when there is too much liquidity, chasing too few investments. It happens at the top of the market. It could occur when some investors are too optimistic, and others are pessimistic. One of the best ways to beat inflation is to sell bonds and buy stocks when the economy is doing well. When the economy slows, consumers buy less, corporate profits fall, and stock prices decline. That's when investors prefer the regular interest payments guaranteed by bonds. There are also are times when stocks and bonds both fall. That’s when investors are in a panic and selling everything. Bond prices and stocks are generally correlated to one another. When bond prices begin to fall, stocks will eventually follow suit and head down as well. As borrowing becomes more expensive and the cost of doing business rises due to inflation, it is reasonable to assume that companies (stocks) will not do as well. During those times, Gold prices often rise.
> If Bond Price ▲, Interest Rate ▼ then Stock ▲
Bonds are safer than stocks but offer lower return. Stocks do well when economy is booming. Sometimes, both stocks and bonds can go up in value at the same time. This happens when there is too much liquidity, chasing too few investments. It happens at the top of the market. It could occur when some investors are too optimistic, and others are pessimistic. One of the best ways to beat inflation is to sell bonds and buy stocks when the economy is doing well. When the economy slows, consumers buy less, corporate profits fall, and stock prices decline. That's when investors prefer the regular interest payments guaranteed by bonds. There are also are times when stocks and bonds both fall. That’s when investors are in a panic and selling everything. Bond prices and stocks are generally correlated to one another. When bond prices begin to fall, stocks will eventually follow suit and head down as well. As borrowing becomes more expensive and the cost of doing business rises due to inflation, it is reasonable to assume that companies (stocks) will not do as well. During those times, Gold prices often rise.
> If Bond Price ▲ then Local Currency ▲
Higher returns on bonds attracts more investors – makes local currency more attractive that that of any economies that is offer lower returns on it’s bonds.
> If USD ▲ then Commodities ▼
Conventional wisdom is that the US dollar has a strong influence on commodity prices. The explanation for this relationship is that since commodities are priced in dollar terms, then commodity prices must move lower when the dollar strengthens to reflect its increased purchasing power. This is a general rule and the correlation isn't perfect, but there's often a significant inverse relationship over time.
> If USD ▼ then Commodities ▲
When the value of the dollar drops, they have more buying power because it requires less of their currencies to purchase each dollar. Classic economics teaches that demand typically increases as prices drop.
> If Gold ▲ then USD ▼
During economic unrest, investors tend to dump USD in favour of gold. Gold maintains intrinsic value.
> If Gold ▲ then AUD/USD ▲
Australia is the 3rd biggest gold producer (China, Australia and Russia), approx. $5bn. Gold has positive correlation (80%) with AUD/USD.
> If Gold ▲ then NZD/USD ▲
One of the largest producers of gold (25th)
> If Gold ▲ then USD/CHF ▼
USD/CHF has a strong link with gold. More than 25% of Switzerland’s money is backed by gold reserves. Gold has a negative correlation with USD/CHF.
> If Gold ▲ then USD/CAD ▼
5th largest producer of gold.
> If Gold ▲ then EUR/USD ▲
Gold and Euro are considered anti-dollar. If gold goes up, EUR/USD goes up as well.
> If Oil ▲ then USD/CAD ▼
Top 5 oil producer in the world. Exports around 5.5 million barrels of oil a day to the US.
> If DOW ▼ then Nikkei ▼
Performance of US economy is closely tied to Japan.
> If Nikkei ▼ then USD/JPY ▼
Yen becomes a safe-haven during economic distress.
> Further Reading:
https://www.thebalance.com/how-the-dollar-impacts-commodity-prices-809294 https://www.investopedia.com/articles/fundamental-analysis/09/intermarket-relations.asp#:~:text=As%20commodity%20prices%20rise%2C%20the,interest%20rates%20and%20bond%20prices.
https://www.thebalance.com/how-bonds-affect-the-stock-market-3305603#:~:text=Bonds%20affect%20the%20stock%20market%20by%20competing%20with%20stocks%20for,in%20value%2C%20bonds%20go%20down.&text=That's%20when%20investors%20prefer%20the%20regular%20interest%20payments%20guaranteed%20by%20bonds.
https://www.thebalance.com/japan-s-economy-recession-effect-on-u-s-and-world-3306007
