Intermarket Analysis: A Complete GuideIntroduction
Intermarket Analysis is the study of relationships between different financial markets—such as equities, bonds, commodities, currencies, and interest rates—to understand the overall direction of the global economy and financial markets. Instead of analyzing a market in isolation, intermarket analysis assumes that all markets are interconnected and that price movements in one market often influence or predict movements in another.
For traders and investors, this approach provides context, confirmation, and often early warning signals. It is especially useful in identifying trends, risk-on/risk-off environments, sector rotation, and major market turning points.
Core Philosophy of Intermarket Analysis
The foundation of intermarket analysis rests on three key ideas:
Markets are globally connected
No market operates independently. Economic growth, inflation, monetary policy, and capital flows affect all asset classes.
Money flows between asset classes
Capital constantly shifts between stocks, bonds, commodities, and currencies based on risk appetite, interest rates, and economic expectations.
Leading and lagging relationships exist
Some markets move ahead of others. For example, bond yields often lead equity trends, and commodities often signal inflation before it appears in economic data.
The Four Major Asset Classes
1. Bonds (Interest Rates)
The bond market is often considered the smart money because it reacts quickly to changes in inflation, growth, and central bank policy.
Rising bond prices → Falling yields → Economic slowdown or risk aversion
Falling bond prices → Rising yields → Economic expansion or inflation expectations
Key Insight:
Bond yields often lead stock market trends. A sharp rise in yields can pressure equity valuations, while falling yields can support stocks—especially growth stocks.
2. Equities (Stocks)
Equities reflect expectations about corporate earnings, economic growth, and liquidity.
Strong stock markets → Economic expansion, risk-on sentiment
Weak stock markets → Economic contraction, risk-off sentiment
Intermarket analysis helps identify which sectors will outperform:
Rising yields → Banks, financials outperform
Falling yields → IT, FMCG, defensive sectors outperform
3. Commodities
Commodities are closely tied to inflation and economic demand.
Rising commodities → Inflationary environment, strong demand
Falling commodities → Deflationary pressures, weak demand
Important relationships:
Crude oil ↔ Inflation & transportation costs
Industrial metals (copper) ↔ Global growth
Gold ↔ Inflation, currency weakness, uncertainty
Copper is often called “Dr. Copper” because it acts as a barometer for global economic health.
4. Currencies (Forex)
Currencies reflect capital flows, interest rate differentials, and economic strength.
Strong currency → Capital inflows, higher interest rates
Weak currency → Capital outflows, inflation risk
Key relationships:
Strong USD → Pressure on commodities and emerging markets
Weak USD → Commodities and emerging markets outperform
In India’s context, USD/INR movements directly impact:
IT stocks (benefit from weaker INR)
Oil marketing companies (affected by stronger USD)
Classic Intermarket Relationships
Bonds vs Stocks
Falling yields usually support equities
Rising yields can hurt equity valuations
Sharp yield spikes often precede equity corrections
Commodities vs Bonds
Rising commodities → Inflation → Rising yields
Falling commodities → Disinflation → Falling yields
Gold vs Real Yields
Gold rises when real yields fall
Gold struggles when real yields rise
USD vs Commodities
Strong USD → Commodities fall
Weak USD → Commodities rise
Economic Cycle and Intermarket Behavior
Intermarket analysis aligns closely with the economic cycle:
1. Early Expansion
Bonds bottom, yields start rising
Stocks begin rallying
Commodities start stabilizing
2. Mid Expansion
Stocks strong
Commodities rising
Yields rising steadily
3. Late Expansion
Commodities peak
Inflation rises
Central banks tighten policy
4. Recession
Stocks fall
Bonds rally
Commodities decline
Gold often outperforms
Understanding where the economy stands helps traders position correctly across markets.
Sector Rotation Using Intermarket Analysis
Capital rotates between sectors depending on intermarket signals:
Rising yields → Banks, capital goods, PSU stocks
Falling yields → IT, FMCG, pharma
Rising oil → Energy stocks outperform
Rising metals → Metal and mining stocks outperform
This approach is widely used by institutional investors to allocate capital efficiently.
Intermarket Analysis for Traders
For Swing & Positional Traders
Use bond yields to confirm equity trends
Watch USD index before trading commodities
Use gold as a hedge during volatility
For Intraday Traders
Pre-market global cues (US bonds, crude oil, Asian markets)
Currency movement impact on index futures
Risk sentiment from US markets
Advantages of Intermarket Analysis
Provides big-picture context
Helps avoid false breakouts
Improves trade confirmation
Identifies early trend reversals
Enhances risk management
Limitations of Intermarket Analysis
Relationships are not fixed forever
Short-term noise can distort signals
Requires understanding of macroeconomics
Not ideal as a standalone trading system
Best Practice:
Use intermarket analysis alongside technical analysis, volume analysis, and price action.
Conclusion
Intermarket Analysis is a powerful framework that helps traders and investors understand why markets move, not just how they move. By studying the interaction between bonds, equities, commodities, and currencies, one can gain deeper insight into economic conditions, capital flows, and market psychology.
In modern markets—where global events, central bank decisions, and capital mobility dominate—intermarket analysis is no longer optional. It is an essential skill for anyone aiming to trade or invest with confidence, discipline, and a long-term edge.
