Intermarket Analysis: Profiting from Global Market Relationships

CHAPTER 11

Futures Markets and Asset Allocation

RELATIVE STRENGTH ANALYSIS AMONG ASSET CLASSES

The previous chapter used relative strength analysis to compare the commodity and stock markets. The CRB Index was starting to outperform stock prices for the first time in 20 years in what was described as a generational shift from paper to hard assets. This chapter expands on the use of ratio analysis to show how to measure the relative strength between bonds, stocks, and commodities in order to determine which of the three asset classes is doing the best at any given time. The idea is to concentrate one’s capital in the classes that are doing the best and to avoid the ones that are doing the worst. Fortunately, ratio charts make it relatively easy to compare the strength or weakness of the three market groups. Ratio charts can help warn of impending trend changes and can be an important supplement to traditional chart analysis. One need not be a charting expert to learn how to spot such trend changes. Market developments since 2000 provide several striking examples of why it is important to know which markets are going up—and which ones are going down.

BONDS VERSUS STOCKS

Bonds and stocks are always competing for investor money. When investors are optimistic about the stock market and the economy, they usually put more money into stocks and less into bonds. When they are more pessimistic about things, they usually commit more funds to bonds and less to stocks. Ratio analysis ...