Intermarket analysis and its application

One of the most popular and, by the way, useful for the development of a trader’s horizon is inter-market analysis, which allows you to determine the global trend by entire asset classes. The founder of intermarket analysis is John Murphy, who wrote the book of the same name in the 90s, which remains relevant today, despite the years of development of the world economy and trading processes. In this article, we will tell you what intermarket analysis is and about its application.

Definition and general information

Intermarket analysis examines the correlation of the main types of assets: currencies, shares, bonds, commodities and others. Analysts use intermarket analysis mainly to determine the stages of risk-on and risk-off business cycles. With its help it’s possible to determine the stage of investing in an asset, the best sector for investment and avoid those assets that will become cheaper in the near future. The correlation of different assets depends on deflationary and inflationary moods around the world or the country to which the asset belongs. Let us take a closer look at this.

Risk-On business cycle — is a period of positive economic environment, when investors actively invest in risk assets: stocks, raw materials and periodically crypt currencies. This means anything that doesn’t guarantee the safety of capital and profits in the future.

Risk-Off business cycle — a period of negative economic environment, when investors actively withdraw capital from risk assets and transfer them to protective or risk-free: bonds, precious metals, deposits or currencies ( cash ), such as USD, CHF, JPY.

Asset Correlation for Inflation

During an acceptable inflationary environment, assets correlate as follows:

• Shares and bonds have a positive correlation (the asset price moves in one direction). Bonds react to the market sentiment before stocks.
• Bonds and commodities have a negative correlation (the price of assets moves in opposite directions).
• USD and goods have a negative correlation (the price of assets moves in opposite directions).