What Is Intermarket Analysis

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Share prices are highly cyclical, investors shift out of shares and into fixed income securities when they expect a recession and then back into shares when there is economy recovery

Look at PE ratios to see if stocks over or under valued

Futures can provide early warnings signs of interest rates and inflation which will then affect FX and the stock markets

Premise of intermarket analysis is that all markets are linked in some way

Interest rates movements affect the stock market. Bond prices move inversely to interest rates and yield, and interest rates can be tracked by monitoring government bond futures. When bond prices are rising, yields are falling and this is normally considered positive for stocks. Hence bond futures can be seen as a leading indicator for the stock market. In turn bond futures are affected by trends in the commodities market. Treasury prices are affected by expectations of inflation. Commodity prices are leading indicator of inflation.

Historical studies will show that a sudden increase in commodity prices will usually lead to a sudden decline in bond prices. The US$ influences commodities, the commodities influence bonds and bonds influence stocks. However if there is deflation, it could cause the stock and bond market to have an inverse relationship as well.