Intermarket Relationships!!!

Ok this post has got me into a lil bit of thinking and put my bookish knowledge to some analytical use. Bookish? Yeah the book I am referring to is Intermarket Analysis by John Murphy and the so is the subject of our discussion. As we are aware that U.S. Dollar Index seems to have broken down (A nice post by Corey). This means that CRB Index should move up now aka GOLD should shine and shimmer. Another thing noticeable is that 30 year U.S Treasury Bonds have fallen! So what that got to do with this? Well Bonds and Stocks have a positive relationship and both should Tango together. Falling Bond prices should also result in falling stocks means S&P 500 should fall??? Below is the chart showing all the four markets;

And this is what Murphy has to say about their relationship:

“Intermarket Technical Analysis is the study of the relationships between the four major financial markets: Stocks, Bonds, Commodities and Currencies. There are three key relationships that bind these four markets together. These relationships are:

• The INVERSE relationship between commodities and bonds
• The POSITIVE relationship between bonds and stocks
• The INVERSE relationship between the US Dollar and commodities

POSITIVE: When one goes up, the other goes up also.

INVERSE: When one goes up, the other goes down.

When these relationships occur, the markets are said to be acting "normally" and there is a good probability the current trends will continue. When one or more of these relationships break down, the markets should be watched carefully for signs of general trend reversals. “

Hmmm so do we scream BEAR? No, we just sit closely and put our new found knowledge to use and quietly follow these relationships and as always, wait for the PRICE to CONFIRM! Like my good friend Mayur keeps on repeating “TRADE THE PRICE AND NOT THE ECONOMICS”