Intermarket Analysis


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Intermarket Analysis    Dow Theory

What it all means ...
Intermarket analysis is a subject that many technicians find helpful in trying to predict the future direction of the market. The basic principle is that all markets are interrelated; markets don't move in isolation. Knowing this can provide important data and give us a backdrop to color recent market action.

The Four markets that we will be watching will be the S&P 500 for stocks, The CRB Index for commodity prices, The U.S. Dollar Index, and the Treasury Yield Index. What we want to see is that the trends for the S&P 500 and U.S. Dollar are rising together. We also want to see the CRB and Treasury yields trend lower. A Change in Trend in one Index may have implication in another. For example, if bond yields fall that will put upward pressure on stocks and vise versa. If the CRB is falling that indicates inflation may be easing and will in turn push bond yields lower. Lastly the U.S. Dollar exerts an influence over interest rates; a rise in the dollar can push the bond yield lower, which in turn will push the stock market higher.

Keeping a close eye on these relationships can help us stay on the right side of the curve and keep the wind at our back. Click to see Intermarket Analysis graphs.

Dow Theory
Dow theory was an idea created by Charles Dow in the late 19th century. Dow's idea was that for an investor to be long stocks when all three major indexes (for the time) were in confirmation. That means that the Dow Industrials, Utilities, and Transports must all be in uptrends. This is called confirmation. If one or all the indexes are in downtrends then there is a state of non-confirmation. The Idea being that if Utilities are rising then interest rates are in a positive position for stocks. If the Transports are rising then that should imply that the economy is strong which also has positive implications for stocks, (a concept much more relative in Charles Dow time). We still find value in this concept and can provide a backdrop for the investing environment. Click to see Dow Theory graph.

Intermarket Analysis
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Dow Theory
For an explanation of what this is click here


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