Intermarket analysis and Business Cycles

The knowledge of business cycles will help you decipher the interconnection between asset classes. For example, a revival in the economy during Phase I would mean a positive outlook for the equity markets. A booming equity market generally suggests reducing investor’s risk aversion and hence the price of Gold subsides (gold generally rises during crisis periods).   

Read through the subsequent sections to know more about the hows and whys of this relationship.

Importance of Intermarket analysis

Legendary technical analyst, John K. Murphy in his book Intermarket Technical Analysis, has famously quoted, “for us as traders and investors it is no longer possible to study any financial market in isolation, whether it's the U.S. stock market or gold futures. Stock traders have to watch the bond market. Bond traders have to watch the commodity markets. And everyone has to watch the U.S. dollar. Then there's the Japanese stock market to consider. So who needs intermarket analysis? I guess just about everyone”

A globalized world is interconnected and so are the financial markets. For some it might look like a hassle to study many markets but for those who understand the intermarket relationship it might be an opportunity. Imagine, you are able to guess the movement of stock markets just by looking at the interest rates, or say you can judge the movement of the Canadian Dollar just by looking at the prices of Gold. Wouldn't that make your life easy? You no longer need to hear out the market gurus on business channels and can base your investment or trading decisions systematically and independently. However, be cautious that intermarket analysis will not give you a specific buy/sell signal, it will however, provide you an efficient confirmation tool for trends and warnings for a reversal.

Whether you are an investor or a trader, whether you look at stocks or bonds, a commodity or forex trader,  intermarket analysis will help you judge the movements of your favorite instrument and earn an edge that you have always been targeting. Also, it helps you to manage the risk by getting early warning signals.