Financial markets do not exist in isolation. Stocks, bonds, commodities, and currencies are all connected through economic forces that create predictable relationships. Understanding these intermarket relationships can give you valuable context for your trading decisions and help you anticipate market moves before they happen.
What is Intermarket Analysis?
Intermarket analysis is the study of how different asset classes relate to and influence each other. Pioneered by John Murphy in the 1990s, this approach recognizes that markets are linked and that moves in one market often signal what is coming in another.
Core concept: No market moves in a vacuum. Changes in interest rates affect currencies, which affect commodities, which affect stocks. Understanding these chains of influence gives you an edge over traders who only watch one market.
The Four Main Asset Classes
Intermarket analysis focuses on four major asset classes and how they interact:
- Stocks: Represent ownership in businesses, sensitive to economic growth expectations
- Bonds: Debt instruments, inversely related to interest rates, seen as safer than stocks
- Commodities: Physical goods like oil, gold, and agricultural products
- Currencies: Exchange rates between different countries' money
Key Intermarket Relationships
1. Bonds and Stocks
The relationship between bonds and stocks is one of the most important in finance. Generally, when interest rates rise (bond prices fall), stocks face headwinds. When rates fall (bond prices rise), stocks get support.
Example: The Bond-Stock Connection
The 10-year Treasury yield rises from 4% to 5% over three months. This creates several effects:
- Higher borrowing costs for companies reduce profits
- Bonds become more attractive relative to stocks
- Growth stocks suffer most as future earnings are discounted more heavily
- Value stocks and dividends become relatively more attractive
2. Dollar and Commodities
The US dollar has an inverse relationship with most commodities. Since commodities are priced in dollars globally, when the dollar rises, commodities become more expensive for foreign buyers, reducing demand.
Trading insight: A strong dollar usually means weak gold, oil, and other commodities. A weak dollar typically supports commodity prices. Watch the Dollar Index (DXY) as a leading indicator for commodity moves.
3. Commodities and Stocks
Rising commodity prices can signal inflation, which eventually leads to higher interest rates that hurt stocks. However, the relationship is nuanced:
- Energy stocks: Rise with oil prices
- Materials stocks: Rise with metals and chemical prices
- Consumer stocks: Can be hurt by rising input costs
- Utilities: May suffer from higher fuel costs
4. Bonds and the Dollar
Higher US interest rates attract foreign capital seeking yield, which increases demand for dollars. This creates a positive correlation between rising rates (falling bond prices) and a stronger dollar.
Example: Interest Rate Differentials
US 10-year yields rise to 5% while German 10-year yields stay at 2%:
- International investors sell euros to buy dollars
- They purchase US Treasuries for the higher yield
- The dollar strengthens against the euro
- This puts pressure on gold and commodities
The Intermarket Chain Reaction
Understanding how these relationships connect helps you trace cause and effect through the markets:
- Inflation rises from strong economic growth or supply shocks
- Bond yields rise as investors demand higher rates to compensate for inflation
- Dollar strengthens as higher rates attract foreign capital
- Commodities fall due to the stronger dollar
- Stocks face pressure from higher rates and changing sector dynamics
Practical Applications for Traders
Confirmation Signals
Use intermarket analysis to confirm your trade ideas. If you want to buy a stock, check if the broader intermarket picture supports your thesis.
Example: Confirming a Gold Trade
You see a bullish setup in gold. Before entering, check:
- Is the dollar weakening? (Supportive of higher gold)
- Are real interest rates falling? (Supportive of gold)
- Are other precious metals also showing strength? (Confirmation)
If the intermarket picture aligns with your trade, the probability of success increases.
Early Warning Signals
Intermarket divergences can warn of upcoming trend changes. If stocks are making new highs but bond yields are falling (suggesting economic concern), the rally may be on borrowed time.
Sector Selection
Use intermarket trends to identify which stock sectors should outperform:
- Rising oil: Energy sector should outperform
- Rising gold: Gold miners should outperform
- Rising rates: Banks may outperform (from net interest margin expansion)
- Strong dollar: Domestic-focused companies over exporters
Building an Intermarket Dashboard
Create a watchlist of key intermarket indicators to check daily:
- DXY: US Dollar Index
- TNX: 10-year Treasury yield
- TLT: Long-term Treasury bond ETF
- GLD: Gold ETF
- USO: Oil ETF
- SPY: S&P 500 ETF
- VIX: Volatility Index
When Correlations Break Down
Intermarket relationships are not constant. They can weaken, strengthen, or even reverse during different market regimes. Be aware of these limitations:
- Crisis periods: Normal correlations often break down during market stress
- Regime changes: Relationships can shift when economic conditions fundamentally change
- Central bank intervention: Policy actions can temporarily distort relationships
Important: Use intermarket analysis as context, not as the sole basis for trades. Combine it with technical analysis and fundamental research for best results.
Monitor Intermarket Relationships
Pro Trader Dashboard helps you track key market relationships and see how different asset classes are performing relative to each other. Stay informed about market-moving trends.
Summary
Intermarket analysis provides valuable context that most traders ignore. By understanding how stocks, bonds, commodities, and currencies influence each other, you can make better-informed trading decisions and anticipate market moves. Start by tracking a few key relationships and gradually build your understanding of how markets connect. This broader perspective will improve both your analysis and your results.
Continue learning with our guides on bond and stock correlations and how the dollar impacts markets.