Secrets of Markets: Intermarket Trends Analysis

One of the secrets in markets that InvestingHaven uses as a foundational aspect in its methodology to forecast markets is a phenomenon called intermarket dynamics. This article explains shortly the rationale behind intermarket trends analysis.

Markets do not move in a vacuum, they move in relation to each other. When leading markets arrive at major resistance or support, they can do two things: either break out / down or bounce back. In doing so, they influence other markets. That is the basis for a new market trend where several markets are part of a similar type of trend, for instance a “risk on” trend, a “risk off” trend, a “fear trend”, a “inflation trend”, etc.

The key point here is that it is one primary trend that starts moving and triggers a domino effect for most other markets.

Because of that, market moves are mostly part of the same trend.

Note that John Murphy, a legend in today’s investing, uses a similar way of analyzing markets, as explained by Forbes and this Stockcharts article.

Wikipedia explains intermarket trends mainly as correlations between markets. While that has a common aspect to our view, the big difference is that we believe those correlations are temporary: they tend to change as new primary trends arise. That is also one of the biggest pitfalls for investors: they continue to believe that former correlations are at play, while the market is meantime behaving differently.

Investopedia does not do a good job in explaining intermarket trends analysis and intermarket analysis, unfortunately not very useful according to us.

Intermarket dynamics and intermarket trends: some recent cases

Let’s look into a former strong intermarket trend. Crude oil crashed between the summer of 2014 and February 2016; as crude collapsed, the dollar went through a monster rally and stocks got hit quite hard (though they did not really collapse). That is what we call intermarket analysis.

Last year, investors would have benefited from shorting crude oil, shorting stocks or going long the U.S. dollar as all these moves were part of one and the same primary trend.

Another case from early 2016 is gold which rallied strongly as a sign of fear; consequently, crude and stocks tanked. Gold’s rally stalled when stocks started rallying. It is important to look at market trends as a function of each other.

In the first part of 2017, we saw leading markets hitting mega resistance and mega support. That is exactly the point where new trends will start.