Intermarket Analysis — stock, bond, dollar and commodity correlations.

Intermarket analysis examines the relationships between different asset classes — stocks, bonds, currencies, and commodities. Markets do not exist in isolation; they are interconnected through capital flows, economic relationships, and investor risk appetite. Understanding these relationships provides a macro context for your trading decisions. Popularized by John Murphy's "Intermarket Analysis," this approach helps explain WHY a market is moving, not just what the chart shows.

The core principle of intermarket analysis is that correlations between asset classes follow predictable patterns based on the economic cycle and investor behavior. When the economy is expanding, stocks rise, commodities rise (demand pull), bonds fall (yields rise as capital flows to risk assets), and the dollar tends to weaken (capital flows to higher-yielding opportunities abroad). When the economy is contracting, the opposite occurs — stocks fall, commodities fall, bonds rise (flight to safety), and the dollar strengthens. These patterns are not rigid rules, but they provide a framework for understanding why markets move together or apart at any given time.

Intermarket analysis adds a macro filter to your technical analysis. Before entering a trade, you check whether the intermarket relationships support or contradict your thesis. If you are bullish on stocks, but bonds are rising (falling yields) and commodities are falling, the intermarket picture suggests economic weakness that may undermine your stock rally. This context does not mean you cannot be long stocks — but it means you should be more cautious and have a clearer reason for your conviction. Intermarket analysis is not a standalone trading system; it is a contextual framework that enhances your existing technical and fundamental analysis. For the technical foundations that pair with intermarket context, see our guides on trends and trendlines and support and resistance.

Stocks and bonds have an inverse relationship in most environments. When investors are risk-seeking, they sell bonds (yields rise) and buy stocks. When risk-averse, they sell stocks and buy bonds (yields fall). But this can break down during QE or when central banks manipulate rates. Understanding the stock-bond relationship is fundamental to reading the macro environment.

Normal Risk-On Environment

In a normal risk-on environment, stocks rise and bond prices fall (yields rise). This is the classic expansionary cycle relationship. Investors sell the safety of bonds to buy riskier assets like stocks. The rising yield reflects both the opportunity cost of holding bonds (stocks are performing better) and inflation expectations (economic growth pushes prices higher). When you see stocks rising and bond yields rising together, the macro picture is clear: the economy is growing, risk appetite is strong, and the trend is your friend. This environment supports long positions in stocks, long positions in cyclical commodities, and short positions in bonds. The rising yield environment also supports financial sector stocks (banks benefit from higher lending rates).

Normal Risk-Off Environment

In a normal risk-off environment, stocks fall and bond prices rise (yields fall). This is the classic flight-to-safety pattern. Investors sell stocks and move capital into the safety of government bonds. The falling yield reflects both the demand for bonds (capital inflow) and expectations of economic slowdown (central bank rate cuts). When you see stocks falling and bond yields falling together, the macro picture is defensive: risk appetite has collapsed and capital is seeking safety. This environment supports long positions in bonds, short positions in stocks, and long positions in defensive sectors like utilities and consumer staples. The falling yield environment also supports gold, which benefits from lower opportunity cost of holding non-yielding assets.

When the Relationship Breaks Down

The stock-bond inverse relationship breaks down in two important scenarios. Scenario one: both stocks and bonds fall. This is a liquidity crisis — investors sell everything to raise cash. It occurred during the 2008 financial crisis and the initial phase of COVID-19 in March 2020. When you see both asset classes falling, the market is in distress and the normal rules do not apply. The best action is to reduce risk and wait for the crisis to pass. Scenario two: both stocks and bonds rise. This occurs during quantitative easing or other central bank interventions that suppress yields and pump liquidity into markets. In this scenario, the normal relationship is distorted by artificial forces. The post-2009 and post-COVID periods saw extended periods of stocks and bonds rising together due to central bank bond buying programs. Recognizing these regime changes is essential for intermarket analysis.

The dollar (DXY) has a strong inverse correlation with commodities (gold, oil, copper). A weaker dollar makes dollar-denominated commodities cheaper for foreign buyers — stimulating demand. Gold has an inverse dollar correlation, especially during inflation expectations. Oil is inversely correlated with the dollar, though supply/demand factors also matter. Emerging market stocks show an inverse correlation with the USD — a strong dollar hurts EM.

The Dollar and Gold

The relationship between the US Dollar Index (DXY) and gold (XAU/USD) is one of the strongest and most consistent intermarket correlations. Gold is priced in dollars, so when the dollar weakens, gold becomes cheaper for buyers using other currencies, stimulating demand. Conversely, when the dollar strengthens, gold becomes more expensive for foreign buyers, suppressing demand. Beyond the pricing mechanism, gold and the dollar both serve as stores of value — a stronger dollar means less need for gold as a hedge, and vice versa. The correlation is not perfect — gold can rise alongside the dollar during periods of extreme fear (both serving as safe havens) — but the general inverse relationship holds approximately 80% of the time. For traders, the dollar-gold relationship is a key input for commodities trading and for understanding the broader liquidity environment. A falling dollar with rising gold suggests accommodative financial conditions; a rising dollar with falling gold suggests tightening conditions.

The Dollar and Oil

Oil (WTI and Brent) also has a significant inverse correlation with the dollar, though the relationship is more complex than gold's because oil is influenced by supply-side factors (OPEC decisions, geopolitical events, production technology) that can override the currency effect. The basic mechanism is the same: a weaker dollar makes oil cheaper for non-dollar buyers, increasing demand and pushing prices higher. However, the oil-dollar relationship is also influenced by the demand channel — a strong dollar often reflects a strong US economy, which increases oil demand and pushes prices higher. This can create periods where the dollar and oil rise together (strong US economy drives both higher). The inverse relationship is most reliable during dollar trend moves (a sustained weakening or strengthening of the dollar) and least reliable during supply-driven oil shocks. For commodities traders, the dollar-oil relationship is a critical input but must be balanced with supply/demand analysis of the oil market itself.

The Dollar and Emerging Markets

Emerging market stocks and currencies have a strong inverse correlation with the US dollar. A strong dollar creates several headwinds for emerging markets: (1) most EM debt is denominated in dollars, so a stronger dollar increases the debt servicing burden, (2) EM central banks must raise rates to defend their currencies, slowing economic growth, (3) dollar strength typically reflects risk-off sentiment, which causes capital to flow out of EM and into safe-haven assets. When the dollar is weakening, the opposite tailwinds support EM: cheaper debt servicing, easier monetary policy, and capital inflows seeking higher yields. The correlation between DXY and the EEM (emerging markets ETF) is one of the strongest intermarket relationships. For traders, this means a weakening dollar supports long positions in EM equities and EM currencies, while a strengthening dollar supports short positions or avoidance of EM exposure entirely.

The sector rotation model shows which sectors lead at different points in the economic cycle. Early expansion (markets bottoming): Consumer Discretionary, Financials, Industrials, Technology. Mid expansion: Healthcare, Energy, Materials. Late expansion: Real Estate, Utilities, Consumer Staples (defensive). Recession: gold, bonds, defensive sectors. Understanding where we are in the rotation helps you position in leading sectors and avoid laggards.

Early Expansion (Recovery)

The early expansion phase begins when the economy emerges from recession. Interest rates are low, stimulus is still in effect, and economic indicators begin to improve. The sectors that lead this phase are Consumer Discretionary (consumers start spending again), Financials (banks benefit from the steepening yield curve as rates rise from low levels), Industrials (manufacturing picks up), and Technology (businesses invest in productivity-enhancing technology). This is typically the most powerful phase for stock market gains because valuations are low and earnings growth is accelerating from a depressed base. The early expansion phase is characterized by rising stock prices, rising bond yields (as capital moves from bonds to stocks), and rising commodity prices (as demand recovers).

Mid Expansion (Peak Growth)

The mid expansion phase is the longest phase of the economic cycle. Growth is solid but no longer accelerating. Interest rates have risen from their lows, and the central bank may be tightening. The sectors that lead in this phase shift to Healthcare (defensive growth with pricing power), Energy (rising commodity prices benefit oil and gas companies), and Materials (rising input prices benefit mining and chemical companies). The early-cycle leaders (Consumer Discretionary, Technology) may still perform well but begin to lag as their growth rates normalize. This is the phase where the stock market can be strong but more selective — broad market gains narrow to specific sectors and themes. The yield curve typically flattens during this phase as short-term rates rise faster than long-term rates.

Late Expansion and Recession

The late expansion phase is characterized by slowing growth, rising inflation pressures, and tightening monetary policy. Leading sectors shift to defensive areas: Real Estate (REITs benefit from high rents and property values), Utilities (stable earnings and high dividends become attractive), and Consumer Staples (non-cyclical demand for essentials). Technology and Consumer Discretionary begin to underperform as rising rates compress valuations and consumers tighten spending. As the economy tips into recession, all cyclical sectors fall. The only assets that perform well are gold (monetary hedge), bonds (flight to safety and falling yields), and defensive sectors (Utilities, Consumer Staples, Healthcare). The sector rotation model helps you anticipate which areas of the market will lead or lag based on where you believe the economy is in the cycle. While precise timing is difficult, the model provides a framework for portfolio positioning that prevents you from holding late-cycle sectors into a recession or early-cycle sectors too late into an expansion.

Global market interconnections are tighter than ever. US markets set the global tone (S&P futures drive Asian/European opens). China and Emerging Markets are sensitive to commodity demand and USD strength. European stocks correlate with EUR/USD and European bond yields. The Japanese yen is a safe haven correlated with Japanese bond yields. Copper has the nickname "Dr. Copper" — it accurately predicts economic turning points.

US Markets as the Global Anchor

The US stock market (S&P 500, Nasdaq) serves as the global anchor for risk sentiment. When the US market opens, it sets the tone for markets worldwide. Asian markets (Japan, China, Australia, India) react to the US close and overnight S&P futures. European markets (UK, Germany, France) trade through the US morning and react to US economic data releases. This hierarchy means that US market conditions — particularly the direction of S&P 500 futures, the VIX, and US bond yields — are essential inputs for trading any global market. A trader focusing only on European stocks without checking US futures is missing the most important external factor affecting their market. The US dollar's role as the global reserve currency amplifies this effect — dollar-denominated debt, dollar-based commodity pricing, and dollar-denominated global trade mean that US monetary policy and US economic data drive global financial conditions.

China and Commodity-Linked Markets

China is the world's largest consumer of most industrial commodities — copper, iron ore, coal, steel, and oil. Chinese economic data (GDP, industrial production, PMIs, property market data) directly drives commodity prices and, through them, the currencies and stock markets of commodity-exporting nations: Australia (iron ore, coal), Canada (oil, lumber), Brazil (iron ore, soybeans), Chile (copper), and South Africa (gold, platinum). When China's economy strengthens, commodity prices rise, commodity currencies (AUD, CAD, NZD, BRL) strengthen, and commodity-exporting stock markets outperform. When China's economy weakens, the opposite occurs. China's own stock market (Shanghai Composite, Hang Seng) is increasingly correlated with global risk sentiment but is also heavily influenced by domestic policy (regulatory changes, property sector interventions) that can decouple it from global markets. For traders, monitoring Chinese economic data is essential for commodities and commodity-currency trading.

Key Cross-Market Indicators

Certain instruments serve as leading indicators for broader market movements. Copper (often called "Dr. Copper" for its PhD in economics) is one of the most accurate predictors of economic turning points because it is used across virtually all industrial sectors — construction, manufacturing, electronics, and infrastructure. When copper prices rise, it signals increasing industrial demand and economic expansion. When copper falls, it signals economic contraction. The VIX (CBOE Volatility Index) measures implied volatility on S&P 500 options and is the default fear gauge for global markets. A rising VIX above 20 signals elevated fear and risk-off conditions. A falling VIX below 15 signals complacency and risk-on conditions. The 10-year US Treasury yield (US10Y) represents the global risk-free rate and influences borrowing costs worldwide. Rising yields above 3% signal tightening financial conditions; falling yields signal easing. These three indicators — copper, VIX, and the 10-year yield — provide a quick macro health check of global market conditions.

How to apply intermarket analysis: Step 1 — Check the daily macro picture (SP500, DXY, US10Y, gold, oil, VIX) before trading any market. Step 2 — Confirm the environment: rising yields + falling dollar = bullish stocks? Step 3 — Check sector performance: are defensives or cyclicals leading? Step 4 — If your market diverges from related markets, investigate why (potential reversal). Step 5 — Use intermarket relationships as a filter: do not go against the macro tide. Step 6 — Monitor VIX for fear vs greed context.

Building Your Daily Macro Routine

A structured daily macro routine takes 10-15 minutes and provides the context for all your trading decisions. Start by reviewing the six core instruments: S&P 500 (SPY or futures), DXY (dollar index), US10Y (10-year yield), gold (XAU/USD), oil (WTI), and VIX. For each instrument, note the direction of the current trend (using a simple 50-day moving average) and whether the instrument is near a significant support or resistance level. Then ask yourself four questions: (1) Are stocks and bonds confirming a risk-on or risk-off environment? (2) Is the dollar supporting or opposing my trade bias? (3) Which intermarket relationships are holding and which are breaking? (4) Is the VIX at a level that supports aggressive trading (below 15), cautious trading (15-20), or risk reduction (above 20)? Write down your macro assessment in one sentence before looking at any individual chart. This discipline ensures you have context before you get into the details. For more on structuring your daily process, see our guide on building a trading plan.

Using Intermarket Relationships as a Filter

The most powerful application of intermarket analysis is as a filter for individual trade ideas. Before entering any trade, check whether the intermarket picture supports your thesis. If you are considering a long position in the Australian dollar (AUD/USD), check the commodity picture (copper, iron ore prices), the Chinese economic data, and the DXY trend. If commodities are rising and the dollar is falling, your AUD long has macro support. If commodities are falling and the dollar is rising, your AUD long is fighting the macro tide. This filter does not mean you cannot take the trade — but it means you should have a clear reason why this time is different and should probably reduce your position size. When the intermarket picture aligns with your technical analysis, you can trade with full conviction. When it conflicts, either pass on the trade or take it with reduced size and tighter risk management. This filtering process is similar to the confluence approach described in our guide on confluence trading system.

When to Act on Intermarket Signals

The best intermarket trading opportunities arise when relationships normalize after a divergence. For example, if the dollar and gold both rise together (breaking the normal inverse relationship), this divergence will typically resolve with either the dollar falling or gold falling. When the resolution begins, the move is often sharp and tradable. Similarly, if stocks and bonds both rise (unusual outside of QE), the resolution when the relationship normalizes creates trading opportunities. The practical approach is to monitor correlations, note when they diverge significantly from historical norms, and wait for confirmation that the normalization is underway before acting. This patient approach catches the strongest moves — the ones that occur when markets realign with their fundamental relationships. For more on managing the risk of these trades, see our guides on position sizing and multi-timeframe analysis.

Intermarket analysis provides the macro context that most retail traders lack. Understanding how stocks, bonds, currencies, and commodities interrelate gives you a significant edge. Start your day with the global macro picture, then drill down into your markets. Continue your learning journey with our next article on Position Sizing & Risk Management. This content is educational and does not constitute financial advice.