ICT Mentorship Core Content - Month 05 - How To Use Intermarket Analysis
Summary
TLDRThis lesson delves into inter-market analysis, emphasizing its importance for long-term trading strategies. It outlines the interconnectedness of bond, commodity, stock, and currency markets, highlighting how understanding these relationships can simplify fundamental analysis. The instructor advises focusing on these four major groups to gain insights, rather than sifting through overwhelming economic data, and stresses the value of these market relationships in confirming long-term analysis and building trading confidence.
Takeaways
- 🌐 Inter-market analysis is a crucial tool for understanding how different financial markets are interconnected and influence each other.
- 📈 The bond and interest rate markets, commodity markets, stock market, and currencies market are the four major groups that need to be analyzed in inter-market analysis.
- 🔗 There is no direct one-to-one correlation between these markets; they do not move in lockstep but have a certain measure of lead and lag time in their relationships.
- 💼 Focusing on these four major groups can provide insights that are as valuable as analyzing fundamental data like CPI or employment trends.
- 📉 Bonds and stocks generally move together, with a bond market rally typically supporting a bull market for stocks, and vice versa.
- 📚 Commodities typically move in the opposite direction to bond prices, with a rising bond market often leading to a falling commodity market.
- 💲 The U.S. dollar index and commodities have an inverse relationship, meaning they move opposite to each other.
- 🌾 Agricultural commodities like grains are sensitive to the strength of the U.S. dollar, affecting export demand.
- 📊 The relationship between bonds and commodities can be indicative of inflationary pressures, with a lag time of 6 to 12 months before changes in trend are reflected.
- 📈 The bond market can act as a leading indicator for the stock market's direction, with a positive correlation between the two.
- 🌐 Understanding these inter-market relationships can help confirm long-term analysis and provide a directional bias for trading, enhancing the probability of successful trades.
Q & A
What is the main focus of the January 2017 ICT mentorship lesson?
-The main focus of the lesson is on inter-market analysis, discussing how different market asset classes are related and the correlations between them without the use of charts or visual aids.
Why is it important to understand the relationships between different world markets?
-Understanding the relationships between world markets is crucial for comprehensive analysis, as it aids in recognizing collective movements and influences that might not be apparent without a macro understanding of global economic activities like exports.
What are the four major groups of inter-market analysis mentioned in the script?
-The four major groups are bond and interest rate markets, commodity markets, the stock market, and the currencies market.
How do bond and stock markets typically move in relation to each other?
-Bonds and stocks generally move together, meaning if bond prices are rallying higher, it is supportive of a bull market for stocks, and vice versa.
What is the relationship between commodity prices and bond prices?
-Commodity prices and bond prices have an inverse relationship, meaning they typically move opposite to each other.
How does the U.S. dollar index relate to commodity prices?
-The U.S. dollar index has an inverse relationship with commodity prices, meaning if the dollar index is moving higher, commodities as a whole should be trending lower, and vice versa.
What impact does a strong U.S. dollar have on agricultural exports?
-A strong U.S. dollar can diminish the demand for exports in the form of grains and livestock, as it makes U.S. agricultural products more expensive for foreign buyers.
What is the lead and lag time for market relationships in long-term macro perspectives?
-In long-term macro perspectives, there can be a lead and lag time of up to 6 to 12 months before changes in one market start to reflect in another related market.
What is the significance of the relationship between the bond market and commodities in terms of inflation?
-The relationship between the bond market and commodities is significant for understanding inflationary trends, as commodities are a leading indication of inflationary environments.
How can the information from inter-market analysis be applied to different trading strategies?
-Inter-market analysis can be applied to various trading strategies, including day trading, scalping, swing trading, and long-term position trading, by providing insights into market trends and helping build probabilities in the trader's favor.
What is the presenter's view on the necessity of understanding fundamental data for successful trading?
-The presenter suggests that while fundamental data is important, focusing on the relationships between the major market groups can provide similar insights without the need to digest overwhelming amounts of fundamental data.
Outlines
🌐 Introduction to Inter-Market Analysis
This paragraph introduces the concept of inter-market analysis, emphasizing its importance in understanding the relationships between different market asset classes. The speaker warns that the content will be dry but useful, advising viewers to pay close attention and take notes. The main focus is on the interconnectedness of world markets, particularly the bond and interest rate markets, commodity markets, stock markets, and currency markets. The speaker explains that these markets do not move in lockstep but are closely related, and understanding their relationships can aid in analysis. The speaker also mentions the importance of having a macro understanding of global economic relationships, such as exports, to fully grasp these market connections.
📈 Bond and Stock Market Relationships
The speaker discusses the relationship between the bond market and the stock market, noting that they generally move together. A rally in bond prices (not yields) supports a bull market for stocks, while a bear market in bonds makes it difficult for stocks to rally. The speaker also explains that commodities typically move in the opposite direction to bond prices, and that currencies are influenced by commodity exports and production. The U.S. dollar index is highlighted as having an inverse relationship with commodities, meaning they move in opposite directions. The speaker suggests using the U.S. dollar Index versus the CRB index (Commodity Research Bureau index) as a measure of this relationship, and provides additional notes on the subject.
📉 Inflation and the Bond-Commodity Relationship
This paragraph delves deeper into the relationship between bonds and commodities, focusing on their inverse relationship and the inflationary impact. The speaker explains that commodities are a leading indicator of inflationary environments and that changes in the bond and commodity relationship can take 6 to 12 months to manifest in trends. The CRB index is noted for its heavy weighting in agricultural and grain markets, while the Goldman Sachs commodity index is recommended for those focusing on energy. The speaker also mentions the importance of considering global trends when analyzing industrial metals and their impact on the market.
🔄 Key Inter-Market Relationships and Their Impact
The speaker outlines key inter-market relationships and their implications for trading. A bullish U.S. dollar index is expected to be bearish for gold, while a bullish gold market suggests bullishness for gold-exporting countries like Australia and New Zealand. The relationship between oil and the U.S. CAD (Canadian Dollar) is also discussed, as is the direct relationship between the Dow and the Nikkei index. The speaker emphasizes that understanding these relationships can provide confirmation for long-term analysis and help build probabilities in a trader's favor. The importance of timing in long-term trend trading is acknowledged, with the speaker noting the challenges of trading on higher time frame charts.
💼 The Value of Understanding Market Relationships
In the final paragraph, the speaker reiterates the value of understanding the relationships between different asset classes in the market. The speaker argues that these relationships can provide insights into market trends without the need to delve into fundamental data. The speaker suggests that by observing the prices and relationships of these asset classes, one can infer the underlying geopolitical and macroeconomic trends. The speaker concludes by encouraging viewers to study these relationships, as they can provide a foundation for long-term trend following and trading with confidence.
Mindmap
Keywords
💡Inter-market analysis
💡Bond market
💡Commodity markets
💡Stock market
💡Currencies Market
💡Macro understanding
💡Fundamental data
💡Lead and lag time
💡Inflation
💡Correlation
💡Long-term analysis
Highlights
Inter-market analysis is predominantly conceptualized thinking with no charts or visual aids, making it dry but useful information.
World markets are directly linked, with correlations existing between different asset classes and sectors.
Understanding the collective relationships between markets aids in analysis, particularly focusing on bond, commodity, stock, and currency markets.
The four major groups of inter-market analysis do not move in lockstep but have a lead and lag time in their relationships.
Economist Theory suggests using market relationships instead of fundamental data for forecasting future prices.
Bonds and stocks generally move together, with bond market trends influencing stock market performance.
Commodities move opposite to bond prices, reflecting their inverse relationship.
The U.S. dollar is inversely related to commodities, impacting export demand and agricultural markets.
The U.S. dollar Index and commodity currencies have a direct relationship, with movements in one often reflecting in the other.
Bonds and commodities have an inverse relationship, with inflationary impacts seen in commodity markets.
The lead and lag time for bond and commodity relationships can be 6 to 12 months, indicating a long-term macro perspective.
The CRB Index is heavily weighted towards agricultural and grain markets, influencing its movements.
The Goldman Sachs commodity index focuses on energy, providing a different perspective on commodity markets.
Bonds and the stock market have a positive correlation, with bond market trends often leading stock market direction.
Deflationary periods are rare but can impact the relationship between bonds, stocks, and commodities.
Key inter-market relationships provide confirmation for long-term analysis and help build trading probabilities.
Understanding inter-market relationships can benefit traders in all facets of trading, from day trading to long-term position trading.
Inter-market analysis provides insights into long-term trends without the need for exhaustive fundamental data analysis.
The relationships between markets, as outlined in the presentation, can lead to the same outcome as fundamental data, offering a macro perspective on market trends.
Transcripts
welcome back folks this is lesson three
in the January 2017 content for the ICT
mentorship
I'm gonna be discussing how to use
inter-market analysis
okay our internet market analysis
presentation here is going to be
predominantly conceptualized thinking so
there's no charts here there's nothing
exciting okay but it's dry useful
information but it's very very dry so
I'm going to warn you ahead of time so
if you're trying to do something apart
from 100 attention you want to see this
lesson for a time when you can focus on
the presentation very closely and take
notes
okay so World Markets are directly
linked to one another and it's probably
a common understanding but a lot of
people don't realize exactly how they're
related what relationships exists what
correlations if the if you will exist
between certain Market asset classes
certain groups in certain sectors
uh there's closely related uh
correlations between some unexpected
markets where without having a global or
macro understanding of what they do as a
country in terms of exports you wouldn't
understand what the relationships would
be without having that information or
that study behind you
so understanding them as a collective
whole or how these markets relate with
one another will Aid in your analysis
and now since the January content is
predominantly focused on 100 long-term
analysis our Focus needs to be on the
relationships of these four groups
the four major groups of inter-market
analysis are as follows
to bond in interest rate markets
the commodity markets
the stock market
and the currencies Market
all four of these groups together are
closely related with one another now
they don't move lock step to one another
there's not a Five Points higher for
bonds therefore it's going to be five
points in another asset class or group
that's going to move in relationship to
that movement it doesn't work like that
since we're looking at long-term macro
perspectives and Analysis Concepts
there's going to be a certain measure of
lead and lag time for some of these
Market relationships and for some of you
that's going to turn you off right away
because you're used to knowing this is
what it's supposed to do and therefore
I'm going to expect it right now and
when you're being a long-term
Trader or using long-term analysis
there's going to be a certain measure of
lead time and lag time before you
actually see the marketplace reflect
what would be expected in terms of the
analysis Concepts
but the benefit of this is and this is
what I have gravitated towards you can
use an economist Theory which is instead
of going through fundamental data
looking at things like CPI or employment
trends or all these fundamental data
points that are released throughout the
month every single month that's just too
much information for me to digest and I
don't ever claim to have the mental
capacity to understand it all in fact
I've said many times in all of my
teachings that I don't believe that
there is a realistic way of staying
abreast of all those types of things if
you're wading through all that data I
mean either you have to be a serious
data nut or
it to me it's over everyone's head you
just I just don't think it could be done
I'd love to meet someone that could do
it fundamentally improve beyond the
shadow of a doubt that they can use that
fundamental data to forecast future
prices okay that would be wonderful if I
could find that that would be something
I would probably add to my repertoire
but in my studies I've never been able
to really ascertain anyone to be able to
use that information and be able to
forecast with a great deal of
accuracy if you will
now even on a long term basis
because the markets are slow to come to
fruition these these Market moves take a
long time to develop and unfold in our
charts
it takes a great deal of patience and
while there's a lot of information to
Wade through if you go through it
fundamentally and using all those data
points and and data
to me if we just focus on these four
major groups it'll give us all the
insights that that data will ultimately
give give you a fundamentalist so what I
mean by that we're going to actually
break down some of the relationships as
we go through this mentorship
but in this teaching here I want to give
you kind of like an overview and some of
the things that I have picked up along
the way as a Trader that I like to focus
on when I'm looking at Market
relationships
all right so enter market analysis
overview now the four major groups for
the inter market analysis
the bond market and interest rate Market
bonds and stocks generally they move
together okay so if we're seeing a Bond
Market rally and it's the bond prices
not the yield okay so if we're looking
at the treasury bond market and the bond
prices are rallying higher in an uptrend
generally that's going to be helpful and
supportive of a bull market for stocks
conversely if you see the bomb the bond
market in a bear Market it's been
trending lower it's going to be very
hard for stocks to Rally in that
environment now it doesn't mean that it
can't rally okay it just means that that
underlying trend of the bond market
moving lower is going to have a effect
and weight on that stock market rally
and eventually you're going to have to
pay the piper and that stock market's
going to have to correct and get back in
alignment with the overall trend of the
bond market
Commodities are a market group that
moved opposite to the bond prices so if
we see bonds moving higher Commodities
will be moving lower in relationship to
that move and
our third Group stock market stocks move
together with bonds as we said you have
to constantly refer to the market
indices for stocks and the bond market
or if you're a stock Trader you can use
the information that's gleaned from the
bond market preferably if you're going
to be a stock market Trader you want to
be looking at the bond market as a
indicator that you have underlying
strength in the bond market so if bond
prices are going higher and your buyer
of stocks then you can go in with a
great deal of confidence that you have
the fundamentals behind you that lower
interest rates with the bond prices
rallying stocks like that if bonds are
trading lower
stocks don't like higher interest rates
and that's what's going to happen if you
see bond prices dropping that means the
interest rate yields are actually
increasing bonds do not like a high
interest rate environment
and currencies obviously are influenced
by Commodities so the effects of export
sales and production in relationship to
certain Commodities that's going to have
a direct impact on specific Commodities
and specific currencies
okay we're gonna look at their first
relationship here as the U.S dollar
versus commodities
okay we're going to look at this as a
inversely related relationship in other
words they move opposites to each other
that means if the dollar Index is moving
One Direction the commodity in as a
group as a whole Commodities will be
moving the opposite direction
so for example specifically US dollar
Index if it's trading higher Commodities
as a whole should be trending lower
and if the dollar Index is trending
lower or trading lower Commodities will
be doing the opposite and going higher
now when we're looking at Commodities
okay grains in agriculturals are very
export sensitive so if we have a
strong dollar that's going to diminish
the desire or demand for exports in the
form of grains and livestock
agricultural markets in other words
grains and meats
and if the US dollar Index shows
weakness that instills an increase or
demand for grain in agricultural exports
US dollar Index if it's going higher or
rallying this is also seen with stocks
and bonds moving up because it's
supportive of
the stock and bond market going higher
US dollar Index if it moves lower this
is seen with support with stocks and
bonds both trending lower as well
US dollar Index if it's moving higher
this is going to be seen with commodity
currencies moving lower
in dollar Index if it's moving down it's
going to see a commodity currency Rally
or movement higher
and the way you measure this is you
could look at the US dollar Index versus
the crb index which is commodity
research Bureau index you can get that
information on the internet at
crbtrader.com I'll give you some notes
in the PDF file
that would include more information on
all the things that you'll hear about in
this presentation
okay the next one is the bonds versus
commodities
and bonds and commodities have an
inverse relationship as well that means
they again move opposite to one another
now if the bond prices or the treasury
bond market okay moves up or trades
higher that generally is going to have a
impact on Commodities moving lower
and if bonds are trending or trading
lower that's going to allow Commodities
to Rally
now when we're looking at the
relationship between bonds or treasury
bonds 30 year treasury nodes
and the commodity Market what we're
really focusing on is inflationary
impact so if we're following along and
looking for signs of inflation it's
going to be noticed in the markets that
are Commodities Commodities are the
leading indication for inflationary
environments
so what's the lead in lag time in a
change or long-term basis for the bond
and commodity relationships because
we're dealing with a long-term macro
perspective on these two assets
it can sometimes take 6 to 12 months
before you see a change in trend on the
relationship between the bonds and the
commodities now that means that
Commodities may turn up and bonds may
eventually turn lower as a result later
on or bonds may turn up and commodities
may turn lower later on as a result of
that it doesn't happen lock step for
step it doesn't give you that immediate
feedback because it's long-term macro
fundamentals are behind these big moves
especially when we're dealing with these
two asset classes in the relationship
basis so it takes a long time sometimes
for the effects of interest rate changes
or supply and demand factors that are
really weighed in the consumption or
production of Commodities as a whole
now treasury bonds or t-bonds versus the
crb index is what you'll be using to
measure the relationship between the two
but the crb index let me add this to
your notes it's very heavily weighted
with the Agricultural and grain markets
so when we look at crb index it's very
very heavy on
soybean prices wheat prices corn prices
cattle prices hog prices okay so you
have to keep that in mind when you're
looking at crb index
foreign
you want to use the Goldman Sachs
commodity index when you're looking for
the energy focused side of the
marketplace in other words it's heavily
weighted on energy
and you want to weigh that against the
bond market
and the Goldman Sachs industrial metal
index and this is
um for focus on global Trends and
it's not meant for metals like silver
Palladium platinum gold okay these
metals are like zinc tin copper aluminum
they're Industrial Metals so they're
heavily sensitive to Global Trends and
big
sensitive tendencies in the marketplace
around the world where if there's a big
demand for Industrial Metals
then you'll see it in this index if
there's not there's also going to be
evidence of that in this index as well
and in summary bond yields when they're
going higher that would be seen with the
bond market going lower or the bond
price is going lower that means bond
yields are increasing and that's going
to push Commodities up
and my bond yields are going down that
means the treasury bond market prices
are going higher that's going to push
Commodities down
okay we're going to look at the bonds
versus the stock market now
this has a positive correlation that
means they move in the same direction
and obviously that means when the bond
market is trending higher or trading
higher that's going to provide strength
for stocks and support for it
name of the bond markets trending or
moving lower this will have an effect
that's bearish on stocks
and the bond market or the treasury bond
or 30-year Benchmark acts as a leading
indicator for stock Direction
the lead in lag time in changes for
long-term trends again can be 6 to 12
months in duration that means what you
see going on in the long-term trends of
the bond market may take a little bit of
time up to yes I say a year before you
see these long-term trends start to
manifest themselves in the stock market
now there's one caveat with this okay
when there's deflationary periods that
means when prices are decreasing and
this is a rarity it doesn't happen a lot
we actually saw this in the latter part
of 1998 it was it was indicated in the
in the markets that there was
potentially that happening but when this
occurs the bonds perform very well
because you're actually seeing the
interest rate markets collapsing
but with bonds going up that's usually
seen in a in a deflationary period
you're usually seeing bonds going higher
the bond prices or treasury bonds price
going higher with stocks going lower and
commodities going down
like I said it's a rarity that ever
happens but usually you would not ever
really going to see a deflation appear
that I can imagine anytime soon
okay finally we're gonna look at some
key inter-market relationships
okay when you're bullish dollar Index
you're gonna be expecting bearishness on
gold
bullishness on gold you're gonna be
expecting Aussie New Zealand to be
bullish because of their nature as a
gold exporter
when oil is bullish you're gonna be
bearish on U.S CAD
uh because of the Canadian export
leadership and oil exports
Dow when it's up or bullish that's knee
K index is bullish as well
is it direct relationship to the Dow
Nikkei
and when Nikkei index is down uh that's
going to be bearish for the US dollar
versus Japanese Yen pair
and generally when yields are down or
bearish that's going to be bearish for
the currency
because money seeks yield
and when gold is bearish that's usually
bullish for US dollar versus CAD
and finally uh by having an
understanding of all these relationships
as a whole conceptually
they give you confirmation of long-term
analysis uh the relationships between
all of them if you're seeing a number of
these things in alignment with your
long-term analysis you're probably on to
the right path you know what you're
looking at the right direction in the
marketplace rarely will you see a wide
disparity with all these things not
aligning if you have a good sample size
of some of these things in alignment
generally your long-term analysis is
probably going to be
true to form it'll probably pan out in
the long-term Direction like you think
it will the problem is timing long-term
Trend trading or long-term analysis and
timing are just in my opinion some of
the hardest things to time because it's
hard to get traders to focus on allowing
a little bit more movement against their
underlying entry point what I mean by
that is because you're trading on higher
time frame charts it's
probably because of your your home life
your time constraints that keep you from
being able to trade with a lower time
frame entry so you're forced many times
to trade off of a daily chart and if
you're going to execute off of a daily
chart you're going to have to permit
yourself a great deal of movement
against you in terms of a stop loss
because your ranges are a lot larger and
you have to require a lot more time but
even with that said if you're going to
be using these points of information and
relationships with inter-market analysis
it's going to help you in any in all
facets of trading regardless of your day
trading scalping short-term trading
swing trading you know or position
trading and long-term scope it's
beneficial to know these things and it
helps build probabilities in your favor
and again nothing in here
equates to 100 a surety uh you know
there's absolutely no guarantee that
nothing out there can't change on drop
of a hat which you think you see in the
charts
could always be wrong because there's
always a human element that's always
involved here then the analyst is you
but I think if you were to spend some
time going over the relationships that's
gone through this presentation if you
spend that time look at it on a macro
level you'll see that there's a great
deal of value in knowing these
relationships and because they are
leading you to a long-term Trend
following directional bias using higher
time frame daily charts
it will give you confidence as a Trader
to know that you're trading with the
underlying fundamentals and you don't
really require all of that time and
energy and and diligence needed to go
through fundamental data the
relationships between these markets as
we outlined in this presentation will
take you to the same outcome that
fundamental data will give you so just
like the relationships here will
sometimes lag
that same lagging effect that happens in
the fundamental data I knew this much
about fundamental data just because the
fundamentals suggest something should be
bullish doesn't mean tomorrow it's going
to go straight up
okay there's going to be time that has
to be built in for that market to start
building in a bullish tenancy and then
it'll start to move higher but long-term
macro Trends okay you can see when
they're starting and shifting and moving
into place by using the information that
we shared in this presentation so again
study it believe me when I tell you the
information in this is worth its weight
in gold it's not something that is sexy
it's not a lot of charts where I can
show you Judas swings and patterns and
all this and that but it's real
information that has a direct
relationship to how the markets work as
a whole
how they tie together and it keeps you
out of having to look at fundamental
data and if there's anything else that
you know you can't associate with in
terms of value that's enough there's so
many things out there you would be
wasting my opinion your time you're
going through all that data and when you
could just simply see what price is
telling you because price in all these
asset classes together as a whole will
reflect what the fundamentals are
actually doing because trained
accredited staff at these big
institutions Banks producers
manufacturers and exporters they're
using that real fundamental data they
have people that are trained accredited
and they're able to use the information
to forecast Trends in sales and and
consumption all those types of things
and they make their business plans
around those those data points
I can't keep abreast of all that stuff
there's too many things that's going on
in my own personal life let alone
you know to keep up with all the
ever-changing things in the marketplace
so if I can look at the price of these
asset classes and the relationship
between the all of all four of them in
concert with one another I will just
like you will come to the conclusion of
what the geopolitical macro Trend and
there I say it fundamental perspective
is on the market as a macro perspective
Trader
until next time wish good luck and good
Trading
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