Like that of most technical analysts, my analytical work for many years relied on traditional chart analysis supported by a host of internal technical indicators. About five years ago, however, my technical work took a different direction. As consulting editor for the Commodity Research Bureau (CRB), I spent a considerable amount of time analyzing the Commodity Research Bureau Futures Price Index, which measures the trend of commodity prices. I had always used the CRB Index in my analysis of commodity markets in much the same way that equity analysts used the Dow Jones Industrial Average in their analysis of common stocks. However, I began to notice some interesting correlations with markets outside the commodity field, most notably the bond market, that piqued my interest.
The simple observation that commodity prices and bond yields trend in the same direction provided the initial insight that there was a lot more information to be got from our price charts, and that insight opened the door to my intermarket journey. As consultant to the New York Futures Exchange during the launching of a futures contract on the CRB Futures Price Index, my work began to focus on the relationship between commodities and stocks, since that exchange also trades a stock index futures contract. I had access to correlation studies being done between the various financial sectors: commodities, Treasury bonds, and stocks. The results of that research confirmed what I was seeing on my charts—namely, that commodities, bonds, and stocks are closely linked, and that a thorough analysis of one should include consideration of the other two. At a later date, I incorporated the dollar into my work because of its direct impact on the commodity markets and its indirect impact on bonds and stocks.
The turning point for me came in 1987. The dramatic market events of that year turned what was an interesting theory into cold reality. A collapse in the bond market during the spring, coinciding with an explosion in the commodity sector, set the stage for the stock market crash in the fall of that year. The interplay between the dollar, the commodity markets, bonds, and stocks during 1987 convinced me that intermarket analysis represented a critically important dimension to technical work that could no longer be ignored.
• Another by-product of 1987 was my growing awareness of the importance of international markets as global stock markets rose and fell together that year. I noticed that activity in the global bond and stock markets often gave advance warnings of what our markets were up to. Another illustration of global forces at work was given at the start of 1990, when the collapse in the American bond market during the first quarter was foreshadowed by declines in the German, British, and Japanese markets. The collapse in the Japanese stock market during the first quarter of 1990 also gave advance warning of the coming drop in other global equity markets, including our own, later that summer.
This book is the result of my continuing research into the world of intermarket analysis. I hope the charts that are included will clearly demonstrate the interrelationships that exist among the various market sectors, and why it’s so important to be aware of those relationships. I believe the greatest contribution made by intermarket analysis is that it improves the technical analyst’s peripheral trading vision. Trying to trade the markets without intermarket awareness is like trying to drive a car without looking out the side and rear windows—in other words, it’s very dangerous.
The application of intermarket analysis extends into all markets everywhere on the globe. By turning the focus of the technical analyst outward instead of inward, intermarket analysis provides a more rational understanding of technical forces at work in the marketplace. It provides a more unified view of global market behavior. Intermarket analysis uses activity in surrounding markets in much the same way that most of us have employed traditional technical indicators, that is, for directional clues. Intermarket analysis doesn’t replace other technical work, but simply adds another dimension to it. It also has some bearing on interest rate direction, inflation, Federal Reserve policy, economic analysis, and the business cycle.
The work presented in this book is a beginning rather than an end. There’s still a lot that remains to be done before we can fully understand how markets relate to one another. The intermarket principles described herein, while evident in most situations, are meant to be used as guidelines in market analysis, not as rigid or mechanical rules. Although the scope of intermarket analysis is broad, forcing us to stretch our imaginations and expand our vision, the potential benefit is well worth the extra effort. I’m excited about the prospects for intermarket analysis, and I hope you’ll agree after reading the following pages.
John J. Murphy