Intermarket analysis is a type of investment analysis that involves studying the relationships and correlations between different financial markets in order to make informed investment decisions. This can include analyzing how different asset classes, such as stocks, bonds, commodities, and currencies, interact with one another and how changes in one market may impact other markets.
Intermarket analysis can help investors to identify trends and patterns that may not be apparent when looking at a single market in isolation, and can provide a more comprehensive view of the overall economic environment. It can be useful for identifying trends that may not be immediately apparent from traditional fundamental analysis, which focuses on individual companies or industries.
Intermarket analysis can be conducted using a variety of tools and techniques, including technical analysis, fundamental analysis, and economic indicators. It is often used by traders and investors to make informed decisions about which assets to buy or sell and when to enter or exit a position.
Market sentiment refers to the overall attitude or sentiment of market participants towards a particular asset or market. It is also known as market bias. The sentiment that traders have towards a forex pair can be influenced by a variety of factors, including economic conditions, news and events, and investor psychology. Market sentiment can have a significant impact on the movement of financial markets and can be a useful consideration for investors making investment decisions.
Intermarket analysis is a method of analyzing the relationships between different financial markets and determining how they may be affecting each other. This can involve looking at the correlations between different asset classes, such as stocks, bonds, commodities, and currencies, and using this information to make investment decisions.
Incorporating market sentiment into intermarket analysis can be useful for investors as it can provide valuable context for understanding how different markets are interacting with each other. For example, if market sentiment towards a particular asset or market is positive, it could potentially lead to increased demand for that asset and potentially drive up its price. On the other hand, if market sentiment towards an asset or market is negative, it could lead to decreased demand and potentially drive down its price. By considering market sentiment alongside other intermarket analysis factors, investors can gain a more comprehensive understanding of the market environment and make more informed investment decisions.
Intermarket analysis compares correlated assets. There are several examples of correlated assets that are found in different markets. For instance, the Norwegian Krone and crude oil are examples of correlated assets. The NOK is traded in the currency markets and crude oil is traded in the commodity markets. The correlation comes from the fact that Norway is a top crude oil producer. The performance of the Norwegian Krone is tied to the performance of crude oil. If Brent crude rises, the NOK rises. The reverse is also the same. The Canadian Dollar also shares a similar correlation, as do the stocks of oil companies such as Shell, BP and Chevron. Doing an intermarket analysis involves looking at the performance of the primary asset (crude oil in this case), and using the information to determine potential trades on the correlated assets.
Here are some examples of how to perform intermarket analysis.
• A) Comparing the performance of different asset classes: For example, an investor may compare the performance of stocks and bonds to determine which asset class is performing better and make investment decisions accordingly. Stocks and bonds are inversely correlated, and changes in interest rates sharpen this correlation. So rising bond yields should lead the trader to the potential for shorting the Nasdaq 100, a risk-associated stock index.
• B) Analyzing the impact of economic indicators on different markets: For example, a trader may study the relationship between the unemployment rate and the stock market to understand how changes in the unemployment rate may impact the stock market. In this case, the employment numbers (such as the US Non-Farm Payrolls) can produce a sentiment among traders, and the stock market’s performance will mirror this sentiment.
• C) Examining the relationship between commodity prices and currency values: For example, an investor may study the relationship between the price of oil and the value of the Canadian dollar, as the two are often correlated. We have also presented the example of the Norwegian Krone and crude oil prices.
• D) Analyzing the impact of global events on different markets: For example, a trader may study the relationship between political events in a foreign country and the performance of that country's stock market, or on prices of commodities produced by that country. In 2010, a short civil unrest in Ivory Coast, the world’s largest cocoa producer, caused cocoa prices to skyrocket. In 2022, the outbreak of civil war between Russia and Ukraine shook crude oil prices.
• E) Examining the correlation between different sectors within the stock market: For example, an investor may study the relationship between the performance of the technology sector and the healthcare sector to determine which sector is performing better and make investment decisions accordingly.
Market sentiment and intermarket analysis should form part of a retail trader’s trading arsenal. They can be used to generate sound trading signals based on fundamentals. The moves that follow tend to last for quite some time, and can generate good trading outcomes.