CHAPTER 1

Intermarket Analysis: The Study of Relationships

This chapter covers the main points of intermarket analysis, starting with the observation that all markets are related. It will also introduce asset allocation and sector rotation strategies at various stages of the business cycle, and explain how stocks peak and trough before the economy. Other points include the important role played by crude oil, how exchange traded funds have revolutionized intermarket trading, the advantage of using charts, why viewing the big picture is important, intermarket implications for technical analysis, how its adds a new dimension to technical work, why it’s an evolutionary step, and why relationships change. It will end with a recap of intermarket principles.

All Markets Are Related

As the name implies, intermarket analysis is the study of how various financial markets are related to each other. This is a departure from prior forms of market analysis, which relied primarily on a single-market approach. Stock market analysts, for example, used to spend their time analyzing the stock market, which included market sectors as well as individual stocks. Stock traders didn’t have much interest in what was happening in bonds, commodity markets, or the dollar (not to mention overseas markets). Fixed-income analysts and traders spent their time analyzing the bond market without worrying too much about other markets. Commodity traders had their hands full tracking the direction of those markets ...

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