Intermarket Analysis

Intermarket analysis examines the relationships between major asset classes to read the broader financial environment and anticipate price movements in a specific market. No single market moves in isolation — each is influenced by the others.

• The four main markets studied: equities, bonds, commodities, and currencies
• Key relationship: bond prices and stock prices typically move in opposite directions during normal conditions
• Key relationship: commodity prices and bond prices typically move in opposite directions
• Key relationship: a stronger US dollar typically suppresses commodity prices denominated in dollars
• Traders use cross-market signals to confirm trends, validate breakouts, and anticipate turning points
• Intermarket relationships are not fixed — they can change during periods of financial stress or structural economic shifts
• Signals from intermarket analysis should always be confirmed with technical or fundamental analysis tools before acting

Intermarket analysis is a method of market analysis that studies the relationships between different asset classes — equities, bonds, commodities, and currencies — to gain a broader understanding of financial market conditions. Rather than analysing a single market in isolation, intermarket analysis recognises that all major markets are connected and that price movements in one market often signal or confirm what is happening — or what is about to happen — in another. The approach was popularised by technical analyst John Murphy, whose work established the foundational relationships that traders continue to apply today.

Key principles of intermarket analysis:

• Markets do not move in isolation — they influence each other through economic, monetary, and investor behaviour channels
• Understanding these relationships provides context that a single-market view cannot offer
• Cross-market signals can confirm trends, warn of divergences, and identify potential turning points before they are visible within a single chart

Intermarket analysis works by mapping the typical directional relationships between asset classes and using deviations from these relationships as analytical signals.

The four core relationships that form the basis of intermarket analysis are:

• Bonds and stocks: Bond prices and stock prices typically move in the same direction during normal economic conditions — rising bond prices (falling yields) signal lower interest rates, which generally support higher equity valuations. During periods of financial stress, however, this relationship can invert — investors may sell both bonds and equities simultaneously and move into cash.
• Bonds and commodities: Bond prices and commodity prices typically move in opposite directions. Rising commodity prices signal inflation — which erodes the fixed value of bond payments and pushes bond prices lower. Falling commodity prices signal deflationary pressure, which typically supports bond prices.
• Commodities and currencies: Most global commodities are priced in US dollars. A strengthening US dollar makes commodities more expensive for buyers in other currencies, typically suppressing demand and commodity prices. A weakening US dollar has the opposite effect — commodity prices tend to rise.

• Stocks and currencies: A stronger domestic currency can reduce the export competitiveness of a country's companies, potentially suppressing equity earnings and valuations. Currency movements are therefore relevant to equity investors with exposure to export-oriented sectors.

  
  

These relationships provide a directional framework — they are tendencies, not certainties, and must be applied with awareness of current economic context.

The four asset classes at the centre of intermarket analysis each play a distinct role in the financial system and interact with the others through specific economic and monetary channels.

How these markets interact across economic cycles:

• Early expansion: Bonds typically bottom first as interest rates fall, followed by equities rising, then commodities rising as demand picks up
• Late expansion: Commodities typically peak first as inflation rises, followed by bonds falling as yields rise, then equities weakening as higher rates compress valuations
• Contraction: Bonds typically rally first as rates are cut, while equities and commodities weaken before eventually bottoming

Traders use intermarket analysis as a confirmation and anticipation tool — cross-market signals add a layer of context to signals from technical analysis within a single market.

1. Confirming trends: When a technical signal within the equity market — such as a breakout above resistance — is accompanied by a consistent cross-market signal — such as rising bond prices suggesting a supportive rate environment — the probability of the signal holding increases. Confirmation across markets reduces the risk of acting on false breakouts.

2. Identifying divergences: Divergences between correlated markets are often early warnings of a potential trend reversal. For example:

• If equity prices continue rising but bond yields are also rising sharply — signalling tighter monetary conditions — the equity trend may be unsustainable
• If oil prices are rising sharply but equity markets in oil-importing countries are not falling, that divergence warrants closer monitoring before assuming a clean bullish trend in equities

3. Anticipating sector rotation: Intermarket signals can indicate which sectors of the equity market are likely to outperform based on current commodity and currency trends:

• Rising commodity prices typically benefit energy and materials sectors
• A strengthening domestic currency typically benefits import-oriented sectors and pressures exporters
• Rising bond yields typically pressure rate-sensitive sectors such as real estate and utilities

4. Reading risk appetite: The relationship between safe-haven assets — government bonds, gold, and defensive currencies — and risk assets — equities and high-yield bonds — provides a continuous read on overall market risk appetite. A shift from risk assets to safe havens signals increasing caution among institutional participants, often before it is visible in equity price action alone.

5. Practical application for equity traders: An equity trader watching a stock from the energy sector, for example, would monitor crude oil price trends, the US dollar index, and bond yield direction — all of which influence sector-level earnings and valuation. A confirming intermarket setup adds conviction to the trade. A conflicting intermarket setup warrants caution regardless of what the individual stock chart shows.

Intermarket analysis is a useful framework but carries important limitations that every trader must understand before relying on it.

• Relationships are not permanent: The typical correlations between asset classes can break down — particularly during periods of financial crisis, structural economic change, or unconventional monetary policy. The 2008 global financial crisis and the COVID-19 period both produced environments where standard intermarket relationships inverted or collapsed temporarily.
• Lag and timing uncertainty: Even when a cross-market relationship holds, the timing of its effect on a specific market can vary significantly — signals from bond markets, for example, may take weeks or months to fully transmit into equity valuations.
• Correlation is not causation: Two markets moving together does not necessarily mean one is causing the other's movement. Both may be responding to a common underlying factor — such as central bank policy or macroeconomic data — rather than directly influencing each other.
• Should not be used in isolation: Intermarket analysis is a contextual tool — it provides background and confirmation, not precise entry or exit signals. It must be used alongside technical analysis, fundamental analysis, or both before any trading decision is made.

Intermarket analysis is the study of how equities, bonds, commodities, and currencies move in relation to each other — and how those relationships can be used to read the broader financial environment. It works by mapping typical directional correlations between asset classes and using deviations from those correlations as signals. Traders use it to confirm trends, identify divergences, anticipate sector rotation, and gauge overall market risk appetite. Its limitations are real — relationships change, timing is uncertain, and signals require confirmation. Used as one layer within a broader analytical framework, intermarket analysis provides market context that a single-market view cannot.