Intermarket analysis studies the relationships between different financial markets: stocks, bonds, commodities, and currencies. No market moves in a vacuum. What happens in the bond market affects stocks, and what the dollar does has consequences for commodities. Those who understand these connections see signals that other investors miss.
Why markets are interconnected
Money flows continuously between markets. When investors want to take risk, money flows from bonds to stocks. When they seek safety, it goes the other way. These money flows create patterns that have predictive value.
Intermarket analysis is, alongside price analysis and indicator analysis, one of the three pillars of technical analysis. Many investors focus only on the first two and thereby miss an important part of the picture.
The four markets
Bonds (interest rates)
Bond prices and interest rates move in opposite directions. When bond prices fall, interest rates rise. Rising rates make borrowing more expensive for businesses and consumers, which over time slows economic growth and puts pressure on stock prices.
Bonds often move before stocks. A turn in the bond market can lead the stock market by months. That is why professional investors always watch what the bond market is doing.
Stocks
The stock market reflects expected future corporate earnings. Stocks react to changes in interest rates, economic data, and earnings reports. In a healthy economy, stocks rise while bonds are stable or slightly declining.
Commodities
Commodities (oil, gold, copper, grain) are an indicator of inflation. Rising commodity prices increase production costs for businesses and the cost of living. This leads to higher inflation, which can force central banks to raise interest rates.
Gold holds a special position. It is seen as a safe haven and often rises when confidence in the economy or currency declines.
Currencies (dollar)
The US dollar is the world's reserve currency. A strong dollar makes commodities (which are priced in dollars) more expensive for the rest of the world, which reduces demand. A weak dollar, on the other hand, stimulates commodity prices.
The dollar and commodities therefore often move in opposite directions.
Classic relationships
- Bonds fall, stocks follow later. When bond prices drop (rates rise), stocks often follow with a delay. The bond market is the canary in the coal mine.
- Dollar rises, commodities fall. A strong dollar makes commodities more expensive for non-dollar countries, which reduces demand.
- Commodities rise, inflation rises. Higher commodity prices feed through into consumer prices. Central banks respond with higher rates.
- Gold rises, confidence falls. Gold is a fear barometer. Rising gold prices point to increasing uncertainty.
- Copper rises, the economy is growing. Copper is used in virtually everything (construction, electronics, infrastructure). Rising copper prices point to increasing economic activity.
Intermarket analysis in practice
You don't need to be an expert in four markets at once. A few practical applications:
- Before buying stocks, check what the bond market is doing. Have bonds been falling for months while stocks are still rising? Be cautious.
- Look at the dollar index (DXY) before taking positions in commodities or emerging markets. A rising dollar is a headwind for both.
- Use gold as a sentiment indicator. Is gold rising while stocks are also rising? Then uncertainty is growing beneath the surface.
- Watch for divergences between markets. If stocks are making new highs but copper and other industrial commodities are lagging behind, the rally may be nearing its end.
Sector rotation
Intermarket analysis also helps in understanding sector rotation. In different phases of the economic cycle, different sectors outperform:
- Early recovery: financials and technology benefit from falling rates and growing confidence
- Mid expansion: industrials and materials benefit from increasing demand
- Late expansion: energy and commodities rise due to inflation
- Recession: defensive sectors (utilities, healthcare, consumer staples) perform relatively better
By understanding which phase the economy is in, you can position your portfolio in the sectors that are likely to perform best.
Limitations
Intermarket relationships are not absolute. They shift over time and are influenced by central bank policies, geopolitical events, and structural changes in the economy. The correlation between bonds and stocks was negative for decades, but can turn positive during periods of high inflation.
Use intermarket analysis as context, not as absolute truth. It tells you which way the wind is blowing, not exactly where the boat is heading. Combined with technical and fundamental analysis, it gives you a more complete picture than any of those methods alone.