# Inter-Market Relationships



## ThingyMajiggy (15 April 2010)

Hey,

Does anyone have any good links or know of any good books or that can enlighten me/us about the relationships between markets, I'm trying to learn more about how markets move with each other, what moves with what, what moves against what, what leads that, what counters this etc and what to conclude from these situations.

-Like ES & USTs usually, it seems, do the opposite. 
-Positive day in the US, SPI can often gap up and fade the following day, same with HSI
-US Dollar Index opposite to Commodities

These are just some of the things I have noticed, but I don't really know much about it, like what role do currencies have with futs and does Crude/Gold effect the equities markets or ES if at all? Things like this, the ones I have mentioned aren't hard facts and they don't occur every time religiously,  they're just things that I have noticed personally that seem to occur fairly often. Would be good to discuss how one would trade these occurrences too, not just things that people have noticed, but how to benefit from that, if anyone has any ideas.

Thought it would be something worth discussing. 

Cheers.


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## professor_frink (15 April 2010)

ThingyMajiggy said:


> Hey,
> 
> Does anyone have any good links or know of any good books or that can enlighten me/us about the relationships between markets, I'm trying to learn more about how markets move with each other, what moves with what, what moves against what, what leads that, what counters this etc and what to conclude from these situations.
> 
> ...




The only book I've ever come across that really deals with this sort of stuff is John Murphy's Intermarket analysis which I quite liked(though it was a few years ago when I read it). It analyses the relationship between the stockmarket, bonds, the CRB index and the DX.


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## ThingyMajiggy (15 April 2010)

professor_frink said:


> The only book I've ever come across that really deals with this sort of stuff is John Murphy's Intermarket analysis which I quite liked(though it was a few years ago when I read it). It analyses the relationship between the stockmarket, bonds, the CRB index and the DX.




Thanks for that prof, will check it out, got the PDF 

Also found links like this but not sure how good they are.


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## MRC & Co (15 April 2010)

Few ones you mentioned. 

Oil will rally with ES as a 'stockmarket' rally is seen as global growth and hence more oil demanded.  However, if the oil price gets too high, it will actually correlate negatively as a high oil price will stiffle the equity rally.

USTs will rally when the ES falls as the ES will fall in a 'risk off' environment and hence, people will buy USTs and USD.  

Most things right now move as 'risk on' when the recovery looks sustainable, and 'risk off' when the recovery looks in trouble.

Meaning basically equities will rally globally, as long as every currency (excluding USD and JPY) as well as commodities.  

When there is fear, the USTs will rally, along with the USD and JPY.

However, a situation like Greece, where it put such downward pressure on Europe specifically, meant all that liquidity had to find a home.  This is why there was a patch there when USD was rallying with the 'risk on' environment, whilst EUR and other European related currencies (SEK, NOK, CHF) were falling.  

So that is a basic overview of correlations, but as you can see, they change at certain times depending on with 'the market' is viewing as important at the time.  

How you trade them, if for example the oil price rallies, and you have a good long set-up in the price action for a commodity currency, you can go long that currency in anticipation it will play short term 'catch up' to the oil price.


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## ThingyMajiggy (15 April 2010)

MRC & Co said:


> Few ones you mentioned.
> 
> Oil will rally with ES as a 'stockmarket' rally is seen as global growth and hence more oil demanded.  However, if the oil price gets too high, it will actually correlate negatively as a high oil price will stiffle the equity rally.
> 
> ...




Great explanation! Exactly what I was after. Thanks MRC  

So what about Gold, is that seen as a "safe" investment? As in, if the stock markets crash, will Gold tend to rally? I noticed in the current state, Gold and Crude seem to be fairly similar. 

What about Asia, does that have any influence on anything, ie. lead our market or be an early indicator for something? I have noticed some days the SPI and HSI won't be anywhere near as closely correlated, there was a few days a few weeks ago where the SPI was fairly weak, but at the same time the HSI was rallying pretty hard- confirming the weakness on SPI as it wasn't responding. 



> When there is fear, the USTs will rally, along with the USD and JPY




So if(when?) the US was to hit the **** again, we should expect a rally in USTs, USD and JPY, how does that play on the USD/JPY? Are there any signs that one should know of about markets leading other markets, like would there be signs of momentum slowing in the USTs before anything obvious happened, therefore giving the expection of a pullback in equities? Or does it move pretty much at the same time etc.


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## MRC & Co (15 April 2010)

Gold is an odd one, it is generally a hedge against inflation and economic uncertainty.  So when there is an inflationary environment or economic uncertainty, i.e. 'risk off' gold should rally.

BUT, at the moment, there is a risk rally and low inflation and gold is still strong.  Uncle Festivus got onto this early as a view that it was actually a hedge against any paper currency in general (of which I did not agree with), but it's the only thing that explains it's strength.  So gold has seen upside in all environments lately.

HSI and SPI or Nikkei etc, sometimes the correlations will be great, one will lead the other intraday, sometimes not.  The trick is to observe when one is leading and trade off that, and not trade off it in periods when they are doing their own thing.  That just takes years of watching it live and practice I think.  

The same goes for your last paragraph.  You will see odd strength in JPY and bonds etc when there shouldn't be as people begin to hedge their portfolio and set-up for a risk off period.  

The JPY is generally a higher beta play to 'risk off' than the USD.  So a crash in the risk rally should and would most likely see, the JPY strengthen against the USD.


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## MRC & Co (15 April 2010)

MRC & Co said:


> The same goes for your last paragraph.  You will see odd strength in JPY and bonds etc when there shouldn't be as people begin to hedge their portfolio and set-up for a risk off period.




Sorry, should have said, you 'may'.  Not will.  It is something to keep an eye on though.  It is looking that way lately actually, with JPY holding firm against the USD despite such 'risk on' sentiment.  Could of course be on the potential Yuan appreciation - but that is a very hard situation to make a decision on.


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## ThingyMajiggy (15 April 2010)

MRC & Co said:


> Gold is an odd one, it is generally a hedge against inflation and economic uncertainty.  So when there is an inflationary environment or economic uncertainty, i.e. 'risk off' gold should rally.
> 
> BUT, at the moment, there is a risk rally and low inflation and gold is still strong.  Uncle Festivus got onto this early as a view that it was actually a hedge against any paper currency in general (of which I did not agree with), but it's the only thing that explains it's strength.  So gold has seen upside in all environments lately.
> 
> ...




Alright, so what would you look for in gauging whether you think the market will continue or that we may see some weakness coming in, like in the bull market we have had, what/would you look for certain things as a hint that things might not be so rosey and that you could expect the equities markets to come off? Or do you just wait for "the" sell off to come in the stock markets? Vice versa too, were you looking at other markets back in March 09 when we turned, were there any signs that things might turn around or do you just wait for the obvious?

Thanks again MRC, really helpful


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## MRC & Co (16 April 2010)

I've made posts on some of these things before.

Don't have time to go through it again.

You are never sure, but at some point, you take the punt with a stop, if your wrong, so be it.  Re-analyse.


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## Naked shorts (26 April 2010)

ThingyMajiggy said:


> So if(when?) the US was to hit the **** again, we should expect a rally in USTs, USD and JPY, how does that play on the USD/JPY? Are there any signs that one should know of about markets leading other markets, like would there be signs of momentum slowing in the USTs before anything obvious happened, therefore giving the expection of a pullback in equities? Or does it move pretty much at the same time etc.




Latest thing I'm hearing is that AUD and CAD might become the new safe heavens during risk-off periods... simply because instos have a set amount of capital that has to be allocated to sovereigns and they are really not liking the look of the US and JPY bonds anymore.


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