Introduction
Inter-market analysis deals with the relationships among equity, fixed income, foreign exchange, and commodity markets. In my analysis, I try and determine what the movement or changes in trend in one market may mean to the others. I search for confirmation and/or divergences in market trends and cycles. Is a move in one market confirmed by expected changes in other markets? If not, then why not?
I focus on a handful of technical chart patterns and work with trend channels. By ‘trend channel’ I mean two parallel lines that determine the top and bottom of a trend. Trend channels are particularly uselful for long-term analysis. For my inter-market work, fundamental research is limited in its usefulness. I find that it is far easier to forecast the economy from the financial markets than it is to make market predictions based on an economic forecast. Market cycles repeat, but never in the same way. Cycles include seasonality, quarterly trends, and month-end distortions. Because there are consistent leads and lags between the cycles of different markets, an important move in one market often forecasts an equally important move in another.
Markets are always rational. Currency trends, as an example, help to explain the direction of the flow of worldwide liquidity. They tend to run for years and are extremely powerful. There are some currencies that I would call naturally strong, since those countries run persistent current account surpluses, and others that are naturally weak for the opposite reason. If a currency like the U.S. dollar moves into an uptrend, it is only because an inordinately large amount of capital is moving toward the U.S. Why? Is it because US short-term interest rates are being held high or is it because of some fundamental reason to do with growth? Is capital being pulled into or is it being pushed toward the US? Is it because growth prospects are rising in one area or diminishing in another? What impact does a rising dollar have on commodity prices? What are the usual lags between major changes in interest rates and gold, oil, or the agricultural complex? What currencies tend to move with or ahead of changes in certain commodities? What effects do major trend changes in the bond market have on the equity market and with what lag?
To help your understanding of inter-market relationships, I have selected a few key relationships that tend to be relatively consistent over time. We shall take up the analysis of these relationships in the following lessons.
