Markets do not move in isolation. Stocks, bonds, commodities, and currencies are interconnected in ways that create powerful signals for traders. Intermarket analysis helps you understand these relationships and anticipate moves before they happen in your primary trading market.
The Four Major Asset Classes
Intermarket analysis focuses on relationships between four main asset classes:
Equities (Stocks)
- S&P 500, NASDAQ, Russell 2000
- International indexes (EFA, EEM)
- Sector ETFs
Fixed Income (Bonds)
- Treasury yields (2-year, 10-year, 30-year)
- Bond ETFs (TLT, IEF, AGG)
- Corporate credit spreads
Commodities
- Gold (GLD) and silver
- Crude oil (USO, CL futures)
- Industrial metals (copper)
- Agricultural commodities
Currencies
- US Dollar Index (DXY)
- Euro, Yen, British Pound
- Emerging market currencies
Core Principle: Capital flows between asset classes based on economic conditions, risk appetite, and relative value. Understanding these flows helps you anticipate moves and confirm trends.
Key Intermarket Relationships
Stocks and Bonds
The stock-bond relationship is fundamental to intermarket analysis:
- Traditional relationship: Stocks and bonds move inversely. When stocks fall, investors flee to bond safety, pushing bond prices up (yields down).
- Inflationary environment: Both can fall together when inflation fears rise and the Fed tightens policy.
- Risk-on rallies: Money flows from bonds to stocks, pushing yields up and stock prices up simultaneously.
Trading Application
Watch the 10-year Treasury yield. Rapidly rising yields can pressure growth stocks. When yields spike but stocks keep rallying, it suggests strong risk appetite. When stocks fall alongside rising yields, stagflation fears may be building.
US Dollar and Commodities
Commodities are typically priced in dollars, creating an inverse relationship:
- Strong dollar: Commodities become more expensive for foreign buyers, reducing demand and prices
- Weak dollar: Commodities become cheaper, increasing demand and prices
- Gold especially sensitive: Often moves opposite to dollar strength
US Dollar and Stocks
The dollar's relationship with stocks is nuanced:
- Multinational earnings: Strong dollar hurts overseas earnings when translated back
- Risk-off dollar strength: In crises, dollar rises as safe haven while stocks fall
- Carry trade dynamics: Weak dollar can boost emerging market stocks
Oil and Stocks
Oil prices affect the economy and market in multiple ways:
- Rising oil: Boosts energy sector, hurts consumer spending and transports
- Falling oil: Helps consumers, hurts energy companies
- Extreme spikes: Can trigger recession fears
- Extreme crashes: May signal demand destruction and economic weakness
The Yield Curve
The yield curve plots bond yields across different maturities and provides crucial economic signals:
Yield Curve Shapes
- Normal (upward sloping): Longer maturities yield more than shorter, indicating healthy economy
- Flat: Short and long yields similar, often a transition phase
- Inverted: Short yields higher than long yields, historically precedes recessions
- Steepening: Long rates rising faster, often signals economic recovery
Key Metric: The 2-year/10-year spread is widely watched. When the 2-year yield exceeds the 10-year (inversion), it has historically preceded recessions by 12-18 months. However, timing market tops based solely on inversion is difficult.
Credit Spreads
Credit spreads measure the difference between corporate bond yields and Treasury yields:
Types of Credit Spreads
- Investment grade spreads: High-quality corporate bonds vs Treasuries
- High yield spreads: Junk bonds vs Treasuries, more sensitive to risk
- TED spread: Measures bank lending stress
Trading Signals
- Widening spreads: Credit stress increasing, risk-off, bearish for stocks
- Tightening spreads: Credit conditions improving, risk-on, bullish for stocks
- Extreme spreads: Panic (wide) or complacency (tight)
Historical Example
Before the 2008 financial crisis, high-yield credit spreads began widening months before stocks peaked. Traders watching credit markets had early warning of the coming trouble. Similarly, credit spread compression in 2020-2021 confirmed the risk-on rally.
Global Market Correlations
International markets provide additional context:
Overnight Moves
- Asia closes before US opens, provides early sentiment read
- European markets overlap with US morning
- Strong overnight action in one direction often carries over
Regional Divergences
- When US leads and international lags, watch for convergence
- Emerging market strength often signals global growth optimism
- Japan and Europe can lead US turns at times
Building an Intermarket Dashboard
Monitor these key instruments daily:
Essential Watchlist
- SPY: S&P 500 ETF
- TLT: 20+ Year Treasury ETF
- GLD: Gold ETF
- UUP: US Dollar ETF
- USO: Oil ETF
- HYG: High Yield Corporate Bond ETF
- EEM: Emerging Markets ETF
- VIX: Volatility Index
Track Your Cross-Market Trades
Pro Trader Dashboard helps you analyze how intermarket conditions affect your trading performance.
Practical Intermarket Trading
Confirmation Trading
Use intermarket analysis to confirm signals in your primary market:
- Stock breakout confirmed by falling dollar and stable bonds
- Stock breakdown confirmed by widening credit spreads
- Rally suspect if bonds also rally (flight to safety)
Divergence Trading
Look for divergences between related markets:
- Stocks rising but credit spreads widening: warning sign
- Dollar falling but gold not rising: check for other factors
- Bonds falling but stocks not rising: uncertainty
Lead-Lag Relationships
Some markets lead others:
- Credit spreads often lead stock moves
- Copper (Dr. Copper) sometimes leads economic cycles
- High yield bonds can lead equity market turns
Currency Impact on Trading
Dollar Strength Scenarios
- Strong dollar + rising stocks: Healthy, US economy outperforming
- Strong dollar + falling stocks: Risk-off, global stress
- Weak dollar + rising stocks: Risk-on, global growth
- Weak dollar + falling stocks: Stagflation fears
Trading Implications
- Strong dollar favors domestic-focused companies
- Weak dollar favors multinationals and exporters
- Emerging markets typically rally with weak dollar
Commodities as Economic Indicators
Copper
Called "Dr. Copper" because it has a PhD in economics. Copper is used in construction, manufacturing, and electronics. Rising copper often signals economic expansion. Falling copper suggests slowing growth.
Oil
Oil reflects both demand (economic activity) and supply (geopolitics). Rising oil from demand is bullish for economy. Rising oil from supply disruption is stagflationary.
Gold
Gold rises during uncertainty, inflation fears, and dollar weakness. It often acts as a safe haven alongside bonds but can diverge based on real interest rates.
Putting It All Together
Create a daily intermarket checklist:
Morning Review
- Check overnight futures across asset classes
- Note 10-year yield direction
- Check dollar index movement
- Review credit spread changes
- Assess overall risk-on or risk-off tone
Integration with Trading
- Align trades with intermarket message
- Reduce size when intermarket signals conflict
- Increase conviction when multiple markets confirm
Summary
Intermarket analysis provides context that pure technical analysis cannot. By understanding how stocks, bonds, commodities, and currencies interact, you gain insight into market character and potential turning points. The relationships are not static, evolving with economic conditions, but the framework of tracking capital flows between asset classes remains valuable for any serious trader.
Continue learning with our sector strength analysis guide or explore risk-on vs risk-off trading.