Intermarket Analysis: Profiting from Global Market Relationships

CHAPTER 5

1999 Intermarket Trends Leading to Market Top

1999 SEES REVERSAL OF 1998 TRENDS

The global deflation fear that gripped the financial markets in 1998 caused a flight out of commodities and stocks and into the bond market. Figure 5.1 shows the decoupling of bonds and stocks that took place in 1998 because of this deflation threat. In 1999, these trends were reversed. The stock market soared to a new record high while bond prices suffered one of their worst years in history (see Figure 5.2). Part of the reason for the fall in bond prices was a sharp rise in the price of oil at the start of 1999, which pushed interest rates higher around the globe as inflation fears resurfaced. A recovery in Asian stock markets also contributed to global demand for industrial commodities like aluminum and copper. The rise in commodity prices prompted the Federal Reserve to start raising interest rates in the middle of the year, a move which contributed to a major top in the stock market the following year.

FIGURE 5.1 Shows decoupling of bonds and stocks during 1998.

FIGURE 5.2 During 1999, stocks rose while bonds fell.

Initially, the negative impact of rising interest rates was seen in two places. One was in the deterioration in market breadth measures like the NYSE Advance-Decline line, ...