Intermarket Analysis and John Murphy Studies

 Automated trading is an excellent tool for building startegies that are based on divergences/convergences between corrrelated markets. Intermarket analysis is a market-driven branch of technical analysis that studies the price relationships between different asset classes.

Automated trading is an excellent tool for building strategies that are based on divergences/convergences between correlated markets. Intermarket analysis is a market-driven branch of technical analysis that studies the price relationships between different asset classes. This is a pure Macroeconomic analysis that studies the dynamics behind all major Intermarket correlations of the past 50 years. 


Introduction to Intermarket Analysis

As world financial markets are getting closer to its other, new Intermarket correlations are emerging. Any modern financial market analysis should incorporate an Intermarket approach. However, Intermarket correlations are not static, and change over time, according to the macroeconomic environment. Inflation and interest rates are the key factors behind any relationship shifting. Intermarket relationships become particularly stronger during periods of a financial crisis. 

The important role of interest rates

The level of interest rates is linked to inflation and plays a significant role in every financial market. Let’s see an example of how Intermarket relationships can create a macroeconomic cycle of events.

An example of how the Macroeconomic Cycle Works

The FED unexpectedly lowers interest rates and that has an immediate negative impact on the exchange rate of the US dollar. A weaker dollar provides a boost to commodity prices. Rising commodity prices are pushing inflation higher. Higher inflation forces FED to re-adjust interest rates higher. This is the middle-cycle phase. As interest rates are now rising, bond prices and stocks are falling. Investment projects are postponed. Consumption is getting lower and unemployment is getting higher. Higher interest rates also push the dollar exchange rate higher. The prices of commodities are declining as the dollar gets stronger. Inflation is diminishing and the central bank has now many good incentives to lower interest rates once again. The cycle is complete.


Lessons from Murphy’s Intermarket Analysis

The financial writer John Murphy is notorious for his work on Intermarket correlations and the clarification of rules and principles according to which these relationships may become completely invalid.

According to Murphy, all markets are related, and what happens in one market has an impact on another. On a macro level, these are the main interrelated asset classes:

  1. Bonds
  2. Stock market
  3. Currencies (Forex)
  4. Energies (focusing on oil)
  5. Industrial metals (copper, aluminum, etc.)
  6. Precious metals (focusing on gold)

No market moves in isolation, and the analysis of one market should incorporate all the others.

These are some examples of asset class interrelations, according to Murphy:

  • Commodity prices move in the opposite direction of the US dollar -Therefore a falling dollar is bullish for commodities
  • A rising dollar is usually good for US stocks and bonds
  • Bond prices move in the opposite direction of interest rates. However, commodities move in the opposite direction of bond prices -Therefore, commodities move in the same direction as interest rates
  • Rising bond prices are normally good for stocks and the bond market, however, during a deflationary phase, bond prices rise while stocks fall
  • Commodities move in the same direction of bond yields, and in the opposite direction of stocks

Table: Summarizing general Intermarket trends












































In the following chart, the inverted relationship between bond yields and commodities (the one side) and stocks (the other side). Note that bond prices and bond yields move in the opposite direction.

  • Treasury Yield (^TNX) Return (10-Years)
  • Bloomberg Commodity Index (^DJP) Total Return (SM) ETN
  • S&P 500 (^GSPC) Return

Chart: Bond Yields, Bloomberg Commodity Index, and S&P 500

The inverted relationship between bond yields and commodities (the one side) and stocks (the other side)..


Financial Crisis Strengthens Intermarket Correlations

The global financial markets became very correlated after 1998, and this was mainly due to global overinvestment in technology stocks during the latter stages of the Nasdaq bubble—and the global stock market collapse after the bubble burst. The fact that virtually all world markets collapsed together after 2000 called into question the wisdom of global diversification. During global bear markets in stocks, all world markets become closely correlated to the downside. This includes the direction of equities, interest rates, exchange rates, and inflationary/deflationary trends.


The US Dollar

One of the key Intermarket relationships is the inverse correlation between the US dollar and commodity prices (especially gold). A falling dollar has an inflationary impact and usually coincides with rising commodity prices. A rising dollar has the exact opposite effect.

A rising dollar is generally good for stocks and bonds. A falling dollar is bearish for bonds and stocks, but only if it coincides with rising commodity prices. A falling dollar can coexist with rising bond and stock prices, as long as commodity prices do not rise.


Inflation and Deflation

According to Murphy, after 1998, deflation plays a key role. For example, throughout the period 2000-2002, deflationary tendencies made bonds a significantly stronger asset class than stocks. The 1970s saw runaway inflation, which favored commodity assets. The 1980s and 1990s were characterized by falling commodities (disinflation) and strong bull markets in bonds and stocks.

Disinflation (1981-1997) is bad for commodities but is good for bonds and stocks. Deflation (which started in 1998) is good for bonds and bad for commodities—but is also bad for stocks. In a deflationary climate, bond prices rise while interest rates fall. However, in such an economic environment, falling interest rates do not help stocks.

Strong deflationary trends may cause a major change in the relationship between bonds and stocks (decoupling). The decoupling of bonds and stocks means that bond and stock prices trend in opposite directions.

Intermarket correlations depend on inflation/deflation

(A) Inflationary Environment

During a ‘normal’ inflationary environment, equities and bonds show a positive correlation. On the other hand, USD and commodities are negatively correlated.

  • Equities and Bonds - Positive Correlation
  • US dollar and Commodities - Inverse Correlation

(B) Deflationary Environment

During a deflationary environment, equities and bonds show an inverse correlation. This also means that equities will have a positive relationship with interest rates.

  • Equities and Bonds - Inverse Correlation
  • US dollar and Commodities - Inverse Correlation
  • Commodities and Bonds - Inverse Correlation
  • Equities and Commodities - Positive Correlation



Commodity Prices and Industrial Metals

Bond and commodity prices always trend in opposite directions. Rising commodity prices signal rising inflation pressure, which puts upward pressure on interest rates and downward pressure on bond prices. On the contrary, commodity prices and bond yields generally trend in the same direction. Commodity prices often change direction ahead of bonds, which also makes them a leading indicator of bond prices, at important turning points.

□ It is important to focus on individual commodities tied to the economy, rather than monitoring general commodity indices.

□ Agricultural commodities more often affected by weather than economic trends

□ Commodity sectors like industrial metals (especially aluminum and copper) are very sensitive to economic trends


Energy Prices

Rising oil prices have contributed to every economic recession in the US since 1970. When oil prices are surging, the Federal Reserve is forced to increase interest rates.

According to Murphy, the US economy had suffered four recessions during 1970-2000. Those that took place in 1974, 1980, 1990, and 1999 —were all accompanied by surging oil prices. Nonetheless, the financial crisis of 2008 was also accompanied by a record oil price (Crude oil $164 in June 2008).

A sharp rise in either the price of oil or gold sends an immediate warning to bond traders and an early warning to stock traders. A rise in both commodities (oil and gold) is especially dangerous for bonds and stocks.


The CRB/Bond Ratio and Stocks

A simple indicator that Murphy used for determining the inflationary phase of the economy is the CRB/bond ratio.

  • CRB Commodity Index Price / Price of Treasury Bonds (or T-Notes)

A rising CRB/bond ratio is generally negative for the stock market since it signals rising inflation and higher interest rates. However, when the CRB/bond ratio is rising, commodity prices are outperforming bond prices. In such a climate, commodity-related stocks should be emphasized (companies involved in basic materials, aluminum, copper, gold, and energy). These stocks should outperform the general market during periods of rising inflation.

In a deflation, rising commodity prices are generally positive for stocks.

These are some key observations:

  • A rising commodity/bond ratio favors inflation-type stocks including gold mining, energy stocks, and basic material stocks (aluminum, copper, paper, and forest products)
  • A falling commodity/bond ratio favors interest-rate-sensitive stocks including consumer staples, utility drugs, and financials


Early Signs of Stock market reversals

Financial markets anticipate economic trends six to nine months into the future. The US Dollar and commodity prices provide an early warning for strong inflationary/deflationary trends. The price of bonds provides an early warning for changes in the level of interest rates and equity prices.

  • Industrial Metals price provide an early warning of economic transition
  • Energy stocks usually change trend ahead of energy prices (a leading indicator of oil prices)
  • Higher energy prices are an early warning for higher inflation and higher interest rates
  • Commodity prices often change direction ahead of bonds (a leading indicator of bonds at important turning points)
  • Bonds tend to turn ahead of stocks (a leading indicator of stocks)
  • NYSE Advance-Decline line starts to advance/decline ahead of the US equity indices
  • In a major market downtrend, technological stocks decline first, followed by transportation stocks (the opposite in an uptrend)
  • Sector rotations can provide early warnings for major market events  (i.e. if the market is shifting from late expansion to early contraction stocks)
  • The stock market usually peaks six to nine months ahead of the economy
  • An inverted yield curve is a strong warning toward recession (younger bond yields are yielding more interest than older bond yields)


Intermarket Correlations are Dynamic

Intermarket correlations are very important and any modern analysis should incorporate an Intermarket approach. Nevertheless, Intermarket correlations should not be considered as static relationships. These relationships change according to the macroeconomic environment. Any Intermarket correlation can pause, and even reverse, for a particular period of time. However, sooner than later, market correlations return to normal. The key factors for validating Intermarket relationships are inflation and the exchange rate of the US Dollar.


■ George Protonotarios, financial analyst

for, copyright (c) all rights reserved



  • Intermarket Analysis: Profiting from Global Market Relationships (John Murphy 2004)
  • Intermarket Technical Analysis: Trading Strategies for the Global Stock, Bond, Commodity, and Currency Markets (John Murphy)
  • Think Like a Whale Trade as a Shark: Combining Fundamentals, Technical Analysis, and Market Sentiment to Trade Forex, Equities, and Cryptocurrencies (George Protonotarios 2020)


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