Intermarket Analysis

Question 1

Four Asset Classes involved in Intermarket Analysis

Answer 1

1. Bonds
2. Stocks
3. Commodities
4. Currencies

Question 2

Commodities and Currencies Trend (2)

Answer 2

1. Trend in the same direction

2. Counter to the dollar (very reliable relationship)

Question 3

At market tops, asset classes turn in which order?

Answer 3

1. Bonds (leading indicator for stocks)
2. Stocks
3. Commodities

Question 4

If oil stocks lead the market may be toppy - why?

Answer 4

Not a good thing for stocks (major market tops and spiking oil prices has historically been correlated.)

If oil prices rise, inflation also rises, which may induce the Fed to raise rates.

Question 5

Sector that leads early during expansion (?)
Sector that leads early in a contraction (?)
Sector that leads during a contraction (?)

Answer 5

1. Consumer discretionary (early expansion)
2. Energy (early contraction)
3. Consumer staples (contraction)

Question 6

Intermarket Relationships (6) 
Leading relationships (2)

Answer 6

1. Dollar and Commodities (inverse)
2. Bonds and Commodities (base metals) (inverse)
3. Bonds and stocks (inverse since 1998)
4. Stocks and Commodities (positive since 2008)
5. Rising Dollar and U.S. Stocks (positive)
6. Weaker Dollar international stocks (positive)
7. Bonds lead stocks
8. Stocks lead commodities
   - Cycles tend to be less reliable at bottoms than tops

Question 7

New normal vs. Old normal

Answer 7

1. Stocks and Bonds now inversely correlated

2. Stock and commodity prices now closely correlated

Question 8

Asset classes that lead in a crisis (2)

Answer 8

1. Gold

2. Oil

Question 9

Sector rotation order

Answer 9

1. Cyclical
2. Technology
3. Industrials
4. Basic materials
5. Energy
6. Staples
7. Healthcare
8. Utilities
9. Financials

Question 10

Inflationary correlation

Deflationary correlation

Answer 10

Inflation: BSD
Deflation: BD