Most forms of technical analysis examine a single variable,
like a stock or exchange-traded fund, also known as an ETF.
Intermarket analysis is a more complex form
of technical analysis.
With intermarket analysis, instead
of looking at an investment on an individual basis,
investors typically consider multiple related asset classes.
The theory behind intermarket analysis
is that assets, such as currencies, commodities, bonds,
and stocks are all connected.
When something impacts one asset,
like currencies, it sets off a chain reaction that
influences other asset classes.
Investors who subscribe to the idea of intermarket analysis
typically monitor economic indicators
to anticipate potential intermarket movements.
These indicators include growth rates, employment,
manufacturing, inflation, interest rates,
and many others.
Because of all these moving parts,
intermarket analysis is complex and nuanced.
It requires a lot of experience to understand
the relationships between various moving
parts of the economy.
In this way, intermarket analysis
is kind of like forecasting the weather.
Meteorologists use multiple variables
when producing tomorrow's forecast.
These might include barometric pressure, satellite images
of cloud formations, wind speeds,
and other atmospheric conditions.
Using multiple variables gives a meteorologist
a better view of the bigger picture.
From this picture, a meteorologist
recognizes patterns and applies them to create
a more accurate forecast.
Investors who use intermarket analysis
use it in kind of the same way.
They look for repeating patterns among assets
to get a better view of the big picture.
They consider the relationships between currencies,
commodities, bonds, and stocks when
using intermarket analysis.
For instance, some may watch for changes in currencies
to impact commodities.
They may pay close attention to currencies of countries
that export commodities.
One example of such a connection is the relationship
between the Canadian dollar and crude oil.
Canada exports a lot of crude oil.
Because of this, the Canadian dollar
is sensitive to price changes in crude oil.
Typically, they both move in the same direction.
Another intermarket relationships
some investors may watch is the relationship
between commodities and bond yields.
These assets are linked by inflation expectations.
Investors might buy commodities and sell bonds
when they expect inflation to increase.
Conversely, they might sell commodities and buy bonds
when they expect inflation to decrease.
Another example is the relationship between stocks
and treasury bonds.
Some investors view stocks as relatively risky
and treasury bonds as relatively safe.
Because of these differences in risk,
investors might buy stocks and sell treasury bonds
when they think the economy is going to grow.
Conversely, when investors think that the economy might slow,
they might sell stocks and buy treasury bonds.
As you can see, intermarket analysis
can be used to identify a variety of relationships
between asset classes.
Investors who utilize intermarket analysis
often believe that a move in one of the asset classes
could proceed a move in another.
These connections are what investors
can use when developing intermarket strategies.
They'll identify a potential relationship between asset
classes and then wait for one to signal
a future move in another.
It works like this.
Suppose an investor is monitoring the Canadian dollar
and crude oil and assumes that these two assets are connected.
The investor might look for the Canadian dollar
to indicate where crude oil might move next.
Observing the move higher in the Canadian dollar,
this investor might buy crude oil
expecting it to follow the currency's lead.
Of course, there's no guarantee it will happen.
When using intermarket analysis to develop investing
strategies, investors are making an assumption
that one asset typically leads while the other follows.
The sequence of which one leads and which one follows
often changes.
For instance, when considering currencies and commodities,
sometimes the commodity moves first
and the currency follows second, and vice versa.
The relationships among asset classes
evolve over time, which makes intermarket analysis
a complex and challenging strategy.
Remember, past performance does not
guarantee future performance.
To better understand intermarket analysis,
it takes experience observing the relationship
between asset classes through different phases
of the economic cycle.
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