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Currencies, Commodities, Bonds, and Stocks

Intermarket analysis is an important part of top-down technical analysis that evaluates the relationships between the four major asset classes: currencies, commodities, bonds, and stocks. Many investors tend to utilize these relationships to help identify the different phases of the business cycles.


There are well-defined correlations between stocks and bonds, bonds and commodities, and commodities and the US Dollar. Intermarket relationships often depend on the underlying structural forces such as inflation or deflation. In a normal inflationary environment, stocks and bonds are often positively correlated. They tend to both move in the same direction (up or down). A classic example of an inflationary period occurred during the 1970s to the 1980s. The key relationships in an inflationary environment are as follows:


1. A positive relationship between bonds and stocks. Bonds tend to turn ahead of stocks. Stocks tend to do well when interest rates decline (rising bond prices) as low-interest rates stimulate economic activity, and the multiplier effect drives corporate earnings/profits.

2. An inverse relationship between bonds and commodities.

3. An inverse relationship between the US Dollar and commodities.


Deflationary pressures occurred soon after 1997-1998 or during the Asian Currency crisis. At the same time, the BRICs began to exert collective influences in the global economy as these emerging countries exported deflationary pressures via cheap labor and inexpensive products. Key relationships in a deflationary environment are:


1. An inverse relationship between bonds and stocks (i.e., Stocks up and Bonds are down).

2. An inverse relationship between commodities and bonds.

3. A positive relationship between stocks and commodities.

4. An inverse relationship between the US Dollar and commodities.


Intermarket analysis remains an intricate part of the top-down approach to investing. It is ideally suited for intermediate-to-longer term time periods. On a near-term basis, the relationships may not work as well as evidenced during the global financial crisis of 2007-2009 and during extreme market conditions when central banks (FED, ECB, Bank of China and etc.) can exert undue influences on the fixed income markets.


Enclosed below are charts of these relationships between stocks (SPX) and currencies (USD), bonds (USB), and commodities (CRB).


Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

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