Cheat Sheet for Intermarket Analysis

You might be glancing at charts and wondering what is happening in the stock market, the bond market, the commodities market, and the currency market, and they all seem to be going in different directions. A heads up - it isn't very clear. What if it could be a little less confusing? What if you had a framework (almost like a cheat sheet) that helps you understand how these markets relate, and what they are telling you about the markets in general?

You can! That is what intermarket analysis does! Once traders and investors understand these relationships, they can anticipate changes instead of being late to the party. In the pages that follow, we will attempt to break down the key points into an easily digestible and practical roadmap.

Intermarket Analysis Defined

Intermarket analysis is the study of the relationships of the four major asset classes: equities, bonds, commodities and foreign currency. No market trades in a vacuum. The movement of one market generally will lead to changes in one of the other markets. Understanding these relationships enables the trader to maintain a broad-based perspective and avoid tunnel vision by focusing on multiple charts or instruments for analysis.

The Four Pillars of Intermarket Relationships

1. Stocks and Bonds

Equity and bond pricing typically move in opposite directions in normal circumstances. For instance, when equity markets are rallying, the typical behaviour of an investor is to exit a lower-risk investment in bonds and invest in a higher-risk investment in equities. This almost always results in lower bond prices and rising yields. Conversely, in a down market or one of higher stress, investors tend to run to bonds, which causes prices to increase and yields to decrease, while equities decline.

2. Bonds and Commodities

Bond yields and commodity pricing are very closely tied to inflation. When commodity prices increase, there tends to be an expectation of inflation, leading to higher bond yields, particularly for bonds that are generally more sensitive to interest rate fluctuations. By their nature, whenever commodity prices are falling, traders are looking for declining inflation or lower demand, which would create lower yields.

3.Commodities and Currencies

Commodity currencies, such as the Canadian dollar (CAD) and the Australian dollar (AUD), often move in tandem with the prices of oil, metals, or agricultural products. Therefore, if oil prices rise, the CAD should appreciate. If oil prices fall, however, CAD will likely fall too.

4. Currencies and Stocks

Global equity performance is a key driver of risk sentiment in currency markets. Investors tend to move toward higher-yielding currencies (such as AUD or NZD) when they are confident, but when they are fearful, the ranks of safe-haven currencies (like the U.S. dollar, Swiss franc, or Japanese yen) swell.

Key Patterns Traders Look Towards

• Rising Bond Yields + Falling Stocks: Commonly signals tighter monetary policy or fear of inflation

• Strong Commodities + Weak Bonds: Typically indicates inflationary pressures that may soon challenge the stock markets

• Weak Commodities + Strong Bonds: Usually signals downswing growth or deflationary forces

• Equity Rallies + Weak Safe-Haven Currencies: This usually indicates strong risk-on sentiment across the markets

How to Use Intermarket Analysis in Practice

Step 1: Start with Bonds

The bond markets often lead the charge. Rising yields highlight equities that may struggle, while falling bond yields may signal a shift towards defensive positioning. As a rule of thumb, check the momentum in key government bonds (like U.S. Treasuries) before analyzing other assets.

Step 2: Looking at Commodities

Next, check oil, Gold, and maybe industrial metals. These are great clues toward inflation, growth and sentiment. Gold tends to rally in times of fear or when real interest rates increase. Step 3: Watch Equity Indexes

Global benchmark indices such as the S&P 500, Nikkei, and DAX signal the prevailing risk appetite of market participants. If equities are on the rise, it is supportive of risk currencies. If markets are declining, safe-haven currencies are being favoured.

Step 4: Confirm with Currencies

Currency moves often confirm or invalidate signals from other markets. That is, if equities are rising, but safe-haven currencies like the JPY are also rallying, then something does not add up, and caution should be exercised.

Why This is Important to Traders

• Avoid being blindsided: If you are only watching one market, you will miss other forces at play.

• Identify leading signals: Occasionally, bonds or even currencies will move ahead of stocks, acting as a precursor to the broader risk sentiment.

• Improve timing: Utilising signals from multiple markets will help to improve your entry and exits.

• Develop the right trading strategy: Different intermarket scenarios require different trading strategies.

Common Pitfalls to Avoid

1. Believing relationships are immutable

Markets are dynamic. Relationships can weaken or turn upside down due to monetary policies, global growth, or some form of crisis.

2. Relying on one key indicator

While the price of oil, bonds or any other single signal should not be dismissed, intermarket analysis works as an aggregate of all indicators.

3. Ignoring the context

A yield that rises when growth is strong is framed differently from a yield that increases rapidly due to inflation fears. Context matters.

4. Overcomplicating the big picture

Please keep it simple! Focus on the macro relationships and avoid getting lost in the minutiae of every possible cross-market intersection.

Case Study Examples

• 2008 Financial Crisis: Equities collapsed, bonds skyrocketed, commodities melted down, and safe-haven currencies soared. This classic "risk-off" scenario demonstrated the intermarket relationships aligning.

• Pandemic shock of 2020: all equities plummeted, bonds rallied, Gold skyrocketed, and the USD blasted off — yet again, textbook intermarket.

• Inflation: rising oil and commodities would often finish by pushing bond yields higher, pressuring equities, and supporting commodity currencies.

How to Build an Intermarket Cheat Sheet

A cheat sheet of some practical intermarket analysis components can include:

• Equities vs Bonds: Risk sentiment and economic growth outlook for equities vs. safer, risk-off bonds.

• Bonds vs Commodities: Inflationary pressures will push bond yields upwards.

• Commodities vs Currencies: Currency strength will often be related to that of commodities like oil +loonie, etc..

• Currencies vs Equities: Currencies and how they confirm or disprove global risk-on/risk-off appetite.

Keep this in mind as you move through markets. With a sustaining approach, you will develop instinctual patterning from these relationships.

Conclusion

Intermarket analysis is the process by which it locates the chaos of global markets back into a readable map. Understanding the dynamics between stocks, bonds, commodities, and currencies enables the reader to identify the broader concept rather than getting lost in a chart or in isolation. Understand this:

while relationships between markets shift and evolve, no single indicator is flawless based solely on timing. You can create your own cheat sheet of these relationships. This step will help impact awareness of your directional insights, risk management and trades with confidence.

In an interconnected world, it is not just about becoming an expert trader in a single specific market, but rather understanding the interconnectivity of markets as a whole. The intermarket analysis strategy is practical and straightforward, with benefits that are a nice addition for traders.