Post by ketch00 on Nov 27, 2020 15:44:46 GMT
Intermarket analysis is a branch of technical analysis that examines correlations between four major asset classes: stocks, bonds, commodities, and currencies. In his classic book Trading with Intermarket Analysis, John Murphy notes that cartographers can use these relationships to define the stage of the business cycle and improve their predictability. There are clear relationships between stocks, bonds, bonds, commodities, commodities, and the dollar. Knowing these relationships can help mapmakers define the stage of the investment cycle, choose the best sectors, and avoid the worst performing sectors. Most of the material for this article comes from Trading with Intermarket Analysis and John Murphy Market Message at www.freeforex-signals.com/ .
Inflationary relationships
Relationships between markets depend on the forces of inflation or deflation. In a "normal" inflationary environment, stocks and bonds are positively correlated. This means that they are both moving in the same direction. The world was in an inflationary environment from the 1970s to the late 1990s. These are the main relationships between markets in an inflationary environment:
A positive relationship between bonds and stocks
Changing the direction of the bond before the stock (usually)
The inverse relationship between bonds and commodities
An inverse relationship between the US dollar and commodities
Positive: When one rises, the other rises as well.
Inverse: When one goes up, the other goes down.
In an inflationary environment, stocks forex signals react positively to low interest rates (rising bond prices). Lower interest rates stimulate economic activity and boost corporate profits. Keep in mind that "inflationary environment" does not mean runaway inflation. It simply means that inflationary forces are stronger than deflationary forces.
Contractionary relationships
Murphy notes that the world shifted from an inflationary environment to a deflationary environment around 1998. It began with the collapse of the Thai baht in the summer of 1997 and quickly spread to neighboring countries, becoming known as the "Asian currency crisis". Asian central bankers raised interest rates to support their currencies, but high interest rates choked their economies and exacerbated problems. The subsequent threat of a global downturn pushed money out of stocks into bonds. Stocks are down sharply, Treasuries have risen sharply and US interest rates have fallen. This was a separation between stocks and bonds that would last for many years. Major deflationary events continued with the bursting of the Nasdaq bubble in 2000, the housing bubble burst in 2006 and the financial crisis erupted in 2007.
Relationships between markets during a deflationary environment are largely the same except for one. Stocks and bonds are inversely related during a deflationary environment. This means that stocks rise when bonds are down and vice versa. Consequently, this also means that stocks have a positive relationship with interest rates. Yes, stocks and interest rates go up together.
It is clear that deflationary forces change the entire dynamic. The deflation is negative for stocks and commodities but positive for bonds. Rising bond prices and lower interest rates increase the risk of deflation, putting downward pressure on stocks. On the contrary, lower bond prices and higher interest rates reduce the risk of deflation, which is positive for stocks. The list below summarizes the key relationships between markets during a downturn.
The inverse relationship between bonds and stocks
The inverse relationship between commodities and bonds
A positive relationship between stocks and commodities
An inverse relationship between the US dollar and commodities
Dollar and commodities
While the dollar and free forex trading signals markets are part of the analysis between the markets, the dollar is a bit of a wild card. Regarding stocks, a weak dollar is not bearish unless it is accompanied by a dangerous rise in commodity prices. It is clear that a major advance in commodities will be bearish for bonds. Consequently, the weak dollar is also generally bearish in bonds. The weak dollar acts as an economic catalyst by making US exports more competitive. This benefits large multinational stocks that derive a large portion of their sales abroad.
What are the effects of the rise in the dollar? A country's currency is a reflection of its economy and balance sheet. Countries with strong economies and strong balance sheets have stronger currencies. Countries with weak economies and large debt burdens are vulnerable to weak currencies. A stronger dollar is putting downward pressure on commodity prices because many commodities are priced in dollars, such as oil. Bonds benefit from lower commodity prices as this reduces inflationary pressures. Stocks can also benefit from lower commodity prices as this reduces raw material costs.
Inflationary relationships
Relationships between markets depend on the forces of inflation or deflation. In a "normal" inflationary environment, stocks and bonds are positively correlated. This means that they are both moving in the same direction. The world was in an inflationary environment from the 1970s to the late 1990s. These are the main relationships between markets in an inflationary environment:
A positive relationship between bonds and stocks
Changing the direction of the bond before the stock (usually)
The inverse relationship between bonds and commodities
An inverse relationship between the US dollar and commodities
Positive: When one rises, the other rises as well.
Inverse: When one goes up, the other goes down.
In an inflationary environment, stocks forex signals react positively to low interest rates (rising bond prices). Lower interest rates stimulate economic activity and boost corporate profits. Keep in mind that "inflationary environment" does not mean runaway inflation. It simply means that inflationary forces are stronger than deflationary forces.
Contractionary relationships
Murphy notes that the world shifted from an inflationary environment to a deflationary environment around 1998. It began with the collapse of the Thai baht in the summer of 1997 and quickly spread to neighboring countries, becoming known as the "Asian currency crisis". Asian central bankers raised interest rates to support their currencies, but high interest rates choked their economies and exacerbated problems. The subsequent threat of a global downturn pushed money out of stocks into bonds. Stocks are down sharply, Treasuries have risen sharply and US interest rates have fallen. This was a separation between stocks and bonds that would last for many years. Major deflationary events continued with the bursting of the Nasdaq bubble in 2000, the housing bubble burst in 2006 and the financial crisis erupted in 2007.
Relationships between markets during a deflationary environment are largely the same except for one. Stocks and bonds are inversely related during a deflationary environment. This means that stocks rise when bonds are down and vice versa. Consequently, this also means that stocks have a positive relationship with interest rates. Yes, stocks and interest rates go up together.
It is clear that deflationary forces change the entire dynamic. The deflation is negative for stocks and commodities but positive for bonds. Rising bond prices and lower interest rates increase the risk of deflation, putting downward pressure on stocks. On the contrary, lower bond prices and higher interest rates reduce the risk of deflation, which is positive for stocks. The list below summarizes the key relationships between markets during a downturn.
The inverse relationship between bonds and stocks
The inverse relationship between commodities and bonds
A positive relationship between stocks and commodities
An inverse relationship between the US dollar and commodities
Dollar and commodities
While the dollar and free forex trading signals markets are part of the analysis between the markets, the dollar is a bit of a wild card. Regarding stocks, a weak dollar is not bearish unless it is accompanied by a dangerous rise in commodity prices. It is clear that a major advance in commodities will be bearish for bonds. Consequently, the weak dollar is also generally bearish in bonds. The weak dollar acts as an economic catalyst by making US exports more competitive. This benefits large multinational stocks that derive a large portion of their sales abroad.
What are the effects of the rise in the dollar? A country's currency is a reflection of its economy and balance sheet. Countries with strong economies and strong balance sheets have stronger currencies. Countries with weak economies and large debt burdens are vulnerable to weak currencies. A stronger dollar is putting downward pressure on commodity prices because many commodities are priced in dollars, such as oil. Bonds benefit from lower commodity prices as this reduces inflationary pressures. Stocks can also benefit from lower commodity prices as this reduces raw material costs.