How I use Intermarket Analysis for Swing Trading

Summary

This video covers the concept of intermarket analysis, as introduced by John Murphy in his 1991 book. It explores the relationship between hard assets (commodities like gold and silver) and soft assets (stocks and bonds), and how these correlations influence asset allocation. The video highlights key principles such as the inverse relationship between gold and the US dollar, as well as the impact of business cycles on investment decisions. Using real-world examples, the speaker demonstrates how understanding these relationships can help investors make informed decisions about portfolio allocation.

Takeaways

• 😀 Intermarket analysis, introduced by John Murphy in 1991, examines the relationships between various asset classes like stocks, bonds, and commodities.
• 😀 Hard assets (e.g., commodities, gold, silver) and soft assets (e.g., stocks, bonds) are inversely correlated. Hard assets rise during inflation, while soft assets decline due to higher interest rates.
• 😀 Secular trends are long-term trends, typically lasting over 5 years, and can help identify major market directions, such as the 2009 secular bull market.
• 😀 In 2012, the ratio of gold to stocks topped, signaling a shift towards soft assets, making stocks and bonds more favorable investments over gold and silver.
• 😀 Business cycles average 4 to 5 years, and each cycle impacts different asset classes (commodities, bonds, stocks) in unique ways, influencing investment decisions.
• 😀 The US dollar plays a significant role in pricing commodities like oil and gold. A declining dollar makes commodities cheaper in foreign currencies but more expensive in dollar terms.
• 😀 The inverse relationship between the US dollar and commodities (like gold) suggests that when the dollar strengthens, gold weakens, and vice versa.
• 😀 Using pair charts and ratios (like gold-to-stocks or dollar-to-gold) helps investors time shifts in asset allocation and make more informed decisions.
• 😀 The relationship between bonds and stocks also follows the business cycle: when interest rates fall, stocks often outperform bonds, and vice versa.
• 😀 A shift in the US dollar’s strength often indicates the timing for other markets. A strong dollar can make it difficult for equities to rally, as seen in recent trends.
• 😀 Intermarket analysis, as laid out by Murphy, helps investors understand the broader economic landscape and make strategic asset allocation decisions based on macro trends.

Q & A

What is intermarket analysis, and how is it used in technical analysis?

Intermarket analysis is a method of evaluating relationships between different asset classes, such as commodities, stocks, bonds, and currencies. It helps analysts identify trends and potential shifts in markets by studying how these asset classes interact with each other. In technical analysis, it can inform decisions on asset allocation and timing by observing the correlations between various market indicators.

Who first introduced the concept of intermarket analysis, and in which book?

The concept of intermarket analysis was first introduced by John Murphy in his book 'Intermarket Technical Analysis,' published in 1991.

What is the difference between hard assets and soft assets in intermarket analysis?

Hard assets refer to physical commodities like gold, silver, and agricultural products, while soft assets are financial assets such as stocks and bonds. These two types of assets tend to have an inverse relationship, meaning when one rises in value, the other typically declines.

How does the relationship between material prices (like gold) and interest rates influence asset allocation?

Material prices like gold often rise when interest rates increase, as higher inflation typically leads to higher material prices. When interest rates go up, paper assets like stocks and bonds become less attractive, leading to a shift away from these soft assets towards hard assets like commodities.

What happened between 1998 and 2012 that caused the typical relationship between gold and stocks to break down?

Between 1998 and 2012, the typical inverse relationship between gold (hard assets) and stocks (soft assets) did not hold. During this period, gold did not outperform as expected, showing that these intermarket relationships are not always constant and can change over time.

What does the term 'secular trend' refer to in intermarket analysis?

A secular trend refers to a long-term trend that lasts beyond a typical business cycle (which lasts 4-5 years). For example, a secular bull market could span several years or even decades, such as the ongoing market since 2009, according to the video.

How can an analyst use intermarket analysis to determine investment allocation?

An analyst can use intermarket analysis by studying the ratios and relationships between different assets, such as gold-to-stocks or bonds-to-stocks. When one asset class outperforms another, this signals a shift in market conditions, allowing investors to adjust their portfolio allocations accordingly.

What role does the US dollar play in intermarket analysis, specifically in relation to commodities like gold?

The US dollar has an inverse relationship with commodities like gold. When the dollar strengthens, commodities become more expensive in foreign currencies, reducing demand and causing prices to drop. Conversely, when the dollar weakens, commodities like gold tend to rise in value.

How does the ratio of gold to stocks signal a shift in asset allocation strategies?

When the ratio of gold to stocks peaks or bottoms, it signals a potential shift in market conditions. For instance, when the gold-to-stock ratio topped in 2012, it signaled that investors should shift from hard assets (like gold) towards soft assets (like stocks and bonds), as stocks and bonds became more favorable investments.

What is the significance of the bond-to-stock ratio in determining market trends?

The bond-to-stock ratio can act as a timing tool for market trends. Historically, when bond yields decrease and bonds outperform stocks, it signals a more defensive market environment. However, when stocks start to outperform bonds, it suggests that a stronger economic phase is underway, and the stock market is more favorable for investment.