Intermarket analysis plays a very important role in the investment evaluation and decision of commodities, bonds, currencies and equities. As all four markets are interrelated, a complete analysis of any single market requires an understanding of the links between the other three markets.
The 16 important intermarket principles are:
- The four main sectors are currencies, commodities, bonds and equities.
- The US dollar usually trends in the opposite direction of the CRB index and Gold.
- A falling US Dollar is normally inflationary and a rising Dollar is normally noninflationary.
- Gold leads the commodities (CRB index).
- The CRB index normally leads and moves in the same direction as bond prices and the opposite direction of stocks.
- A rising CRB Index is normally inflationary and a falling Index is deflationary.
- Bond yields normally lead and move in the same direction as the stock market.
- A falling bond market is normally bullish for equities and a rising bond market is normally bearish for equities.
- The Dow Utilities index normally follows the bond yields and leads the stock market.
- The US stock and bond markets are linked to the major global markets.
- Certain stock groups (auto manufacturing, savings and loans, security brokerage firms and interest sensitive stocks) normally lead the stock market.
- Gold and oil stocks normally lead the direction of inflation.
- All markets are interrelated and none move in isolation.
- During a deflation (which is quite rare), equities fall while bond prices rise.
- A rising Dollar is good for equities.
- A weak Dollar favours large multinationals.