Welcome back folks. This is lesson three in the January 2017 content for the ICT Mentorship. We'll be discussing how to use intermarket analysis.
Okay, our intermarket analysis presentation here is going to be predominantly conceptualized thinking. So there's no charts here. There's nothing exciting.
Okay, but it's dry. useful information, but it's very very dry. So I'm going to warn you ahead of time.
So if you're trying to do something apart from 100% attention, you want to save this lesson for a time when you can focus on the presentation very closely and take notes. Okay, so world markets are directly linked to one another and it's probably a common understanding, but a lot of people don't realize exactly how they're related, what relationships exists, what correlations, if you will, exist between certain market asset classes, certain groups, and certain sectors. There's closely related correlations between some unexpected markets where without having a global or macro understanding of what they do as a country in terms of exports, you wouldn't understand what the relationships would be without having that information or that study behind you.
So understanding them as a collective whole or how these markets relate with one another will aid in your analysis. Now since the January content is predominantly focused on 100% long term analysis, our focus needs to be on the relationships of these four groups. The four major groups of intermarket analysis are as follows.
The Bonded Interest Rate Markets, the Commodity Markets, the stock market, and the currencies market. All four of these groups together are closely related with one another. Now, they don't move lockstep to one another.
There's not a five points higher for bonds, therefore it's going to be five points in another asset class or group that's going to move in relationship to that movement. It doesn't work like that. Since we're looking at long-term macro perspectives and analysis concepts, There's going to be a certain measure of lead and lag time for some of these market relationships. And for some of you, that's going to turn you off right away because you're used to knowing this is what it's supposed to do. Therefore, I'm going to expect it right now.
And when you're being a long term trader or using long term analysis, there's going to be a certain measure of lead time and lag time before you actually see the marketplace reflect what would be expected in terms of the analysis concepts. But. benefit of this is, and this is what I have gravitated towards, you can use an economist theory, which is instead of going through fundamental data, looking at things like CPI or employment trends, or all these fundamental data points that are released throughout the month, every single month, that's just too much information for me to digest. And I don't ever claim to have the mental capacity to understand it all. In fact, I've said many times in all of my teachings that I don't believe that there is a problem.
realistic way of staying abreast of all those types of things if you're wading through all that data. I mean either you have to be a serious data nut or it to me it's over everyone's head. You just I just don't think it could be done. I'd love to meet someone that could do it fundamentally and prove beyond a shadow of a doubt that they can use that fundamental data to forecast future prices.
Okay, that would be wonderful. If I could find that that would be something I would probably add to my repertoire. In my studies, I've never been able to really ascertain anyone to be able to use that information and be able to forecast with a great deal of accuracy, if you will. Now, even on a long term basis, because the markets are slow to come to fruition, these market moves take a long time to develop and unfold in our charts. It takes a great deal of patience.
And while. there's a lot of information to wade through if you go through it fundamentally and using all those data points and data. To me, if we just focus on these four major groups, it'll give us all the insights that that data will ultimately give a fundamentalist. So what do I mean by that?
We're going to actually break down some of the relationships as we go through this mentorship. But in this teaching here, I want to give you kind of like an overview and some of the things that I have picked up along the way as a trader that I like to focus on when I'm looking at. market relationships. Alright, so intermarket analysis overview.
Now the four major groups for the intermarket analysis. The bond market and interest rate market. Bonds and stocks, generally they move together. Okay, so if we're seeing a bond market rally and it's the bond prices, not the yield. Okay, so if we're looking at the treasury bond market and the bond prices are rallying higher in an uptrend, generally that's going to be helpful and supportive of a bull market for stocks.
Conversely, if you see the bond... the bond market in a bear market and it's been trending lower, it's going to be very hard for stocks to rally in that environment. Now, it doesn't mean that it can't rally.
It just means that that underlying trend of the bond market moving lower is going to have an effect and weight on that stock market rally. And eventually, you're going to have to pay the piper and that stock market is going to have to correct and get back in alignment with the overall trend of the bond market. Commodities are... market group that move opposite to the bond prices. So if we see bonds moving higher commodities will be moving lower in relationship to that move.
And our third group, stock market, stocks move together with bonds as we said. You have to constantly refer to the market indices for stocks and the bond market. Or if you're a stock trader you can use the information that's gleaned from the bond market.
preferably if you're going to be a Stock market trader, you want to be looking at the bond market as an indicator that you have underlying strength in the bond market. So if bond prices are going higher and you're a buyer of stocks, then you can go in with a great deal of confidence that you have the fundamentals behind you, that lower interest rates with the bond prices rallying stocks like that. If bonds are trading lower, stocks don't like higher interest rates, and that's what's going to happen if you see bond prices dropping.
That means the interest rate yields are actually increasing. bonds do not like a high interest rate environment and currencies obviously are influenced by commodities so the effects of export sales and production in relationship to certain commodities that's going to have a direct impact on specific commodities and specific currencies. Okay, we're look at their first relationship here as the US dollar versus commodities Okay, we're going to look at this as an inversely related relationship. In other words, they move opposite to each other.
That means if the dollar index is moving one direction, the commodity as a group, as a whole, commodities will be moving the opposite direction. So, for example, specifically, U.S. dollar index, if it's trading higher, commodities as a whole should be trending lower. And if the dollar index is trending lower or trading lower, commodities will be doing the opposite and going higher. Now when we're looking at commodities, grains and agricultural are very export sensitive. So if we have a strong dollar, that's going to diminish the desire or demand for exports in the form of grains and livestock agricultural markets.
In other words, grains and meats. And if the U.S. dollar index shows weakness, that instills an increase or demand for grain and agricultural exports. US dollar index if it's going higher or rallying this is also seen with stocks and bonds moving up because it's supportive of the stock and bond market going higher. US dollar index if it moves lower this is seen with support with stocks and bonds both trending lower as well.
US dollar index if it's moving higher this is going to be seen with commodity currencies moving lower. In dollar index if it's moving down it's going to see a commodity currency rally or movement higher. And the way you measure this is you could look at the US dollar index versus the CRB index, which is the Commodity Research Bureau index.
You can get that information on the internet at CRBTrader.com. I'll give you some notes in the PDF file that will include more information on all the things that you'll hear about in this presentation. The next one is the bonds versus commodities.
Bonds and commodities have an inverse relationship as well. That means they again move opposite to one another. Now if the bond prices or the treasury bond market moves up or trades higher, that generally is going to have an impact on commodities moving lower. If bonds are trending or trading lower, that's going to allow commodities to rally.
Now, when we're looking at the relationship between bonds or treasury bonds, 30-year treasury notes, and the commodity market, what we're really focusing on is inflationary impact. So if we're following along and looking for signs of inflation, it's going to be noticed in the markets that are commodities. Commodities are the leading indication for inflationary environments.
So what's the lead and lag time in a change or long-term basis for the bond and commodity relationships? Because we're dealing with a long-term macro perspective on these two assets, it can sometimes take 6 to 12 months before you see a change in trend on the relationship between the bonds and the commodities. Now, that means that commodities may turn up and bonds may eventually turn lower as a result later on, or bonds may turn up. And commodities may turn lower later on as a result of that.
It doesn't happen lock step for step. It doesn't give you that immediate feedback because it's long term macro fundamentals are behind these big moves, especially when we're dealing with these two asset classes in the relationship basis. So it takes a long time sometimes for the effects of interest rate changes or supply and demand factors that are really weighed in the consumption or production of commodities as a whole.
Now, Treasury bonds or T-bonds versus the CRB index is what you'll be using to measure the relationship between the two. But the CRB index, let me add this to your notes, it's very heavily weighted with the agricultural and grain markets. So when we look at CRB index, it's very, very heavy on soybean prices, wheat prices, corn prices, cattle prices, hog prices. OK, so you have to keep that in mind when you're looking at CRB index.
You want to use the Goldman Sachs Commodity Index when you're looking for the energy focused side of the marketplace. In other words, it's heavily weighted on energy and you want to weigh that against the bond market. And the Goldman Sachs Industrial Metal Index.
And this is for focus on global trends. And it's not meant for metals like silver, palladium, platinum, gold. OK, these metals are like zinc, tin. copper, aluminum, they're industrial metals. So they're heavily sensitive to global trends and big sensitive tendencies in the marketplace around the world where if there's a big demand for industrial metals, then you'll see it in this index.
If there's not, there's also going to be evidence of that in this index as well. And in summary, bond yields. When they're going higher, that would be seen with the bond market going lower, or the bond prices going lower.
That means bond yields are increasing, and that's going to push commodities up. And when bond yields are going down, that means the treasury bond market prices are going higher. That's going to push commodities down. Okay, we're going to look at the bonds versus the stock market now. This is a positive correlation that means they move in the same direction and obviously that means when the bond market is trending higher or trading higher that's going to provide strength for stocks and support for it.
And when the bond market is trending or moving lower this will have an effect that's bearish on stocks. The bond market or the treasury bond or 30-year benchmark acts as a leading indicator for stock direction. The lead and lag time in changes for long-term trends, again, can be 6 to 12 months in duration.
That means what you see going on in the long-term trends of the bond market may take a little bit of time up to, yes, I say a year before you see these long-term trends start to manifest themselves in the stock market. Now, there's one caveat with this. When there's deflationary periods, that means when prices are decreasing. And this is a rarity. It doesn't happen a lot.
We actually saw this in the latter part of 1998. It was it was indicated in the markets that there was potentially that happening. But when this occurs, the bonds perform very well because you're actually seeing the interest rate markets collapsing. But with bonds going up, that's usually seen in a deflationary period.
You're usually seeing bonds going higher, the bond prices. or treasury bonds price going higher with stocks going lower and commodities going down. Like I said, it's a rarity that ever happens, but usually we're not ever really going to see a deflationary period that I can imagine anytime soon. Okay, finally we're going to look at some key intermarket relationships.
Okay, when you're bullish dollar index, you're going to be expecting bearishness on gold. Bullishness on gold, you're going to be expecting Aussie New Zealand to be bullish because of their Nature as a gold exporter when oil was bullish you're gonna be bearish on US CAD Because of the Canadian export leadership and oil exports Dow when it's up or bullish That's Nikkei index is bullish as well. There's a direct relationship to the Dow Nikkei and when Nikkei index is down That's going to be bearish for the US dollar versus Japanese yen pair. And generally when yields are down or bearish That's going to be bearish for the currency because money seeks yield and when gold is bearish that's usually bullish for US dollar versus CAD and finally By having an understanding of all these relationships as a whole conceptually they give you confirmation of long-term analysis. The relationships between all of them, if you're seeing a number of these things in alignment with your long-term analysis, you're probably on to the right path.
You're looking at the right direction in the marketplace. Rarely will you see a wide disparity with all these things not aligning. If you have a good sample size of some of these things in alignment, generally your long-term analysis is probably going to be... true to form it'll probably pan out in the long term direction like you think it will. The problem is timing.
Long term trend trading or long term analysis and timing are just in my opinion some of the hardest things to time because it's hard to get traders to focus on allowing a little bit more movement against their underlying entry point. What I mean by that is because you're trading on higher time frame charts it's probably because of your your home life your Time constraints that keep you from being able to trade with a lower time frame entry So you're forced many times to trade off of a daily chart and if you're going to execute off of a daily chart You're gonna have to permit yourself a great deal of Movement against you in terms of a stop-loss Because the ranges are a lot larger and you have to require a lot more time, but even with that said If you're going to be using these points of information and relationships with intermarket analysis, it's going to help you in any and all facets of trading. Regardless if you're day trading, scalping, short-term trading, swing trading, or position trading in long-term scope, it's beneficial to know these things.
And it helps build probabilities in your favor. And again, nothing in here equates to 100% assurity. You know, there's absolutely no guarantee that nothing out there can't change on the drop of a hat.
What you think you see in the charts could always be wrong because there's always a human element that's always involved here. The analyst is you. But I think if you were to spend some time going over the relationships that's gone through this presentation, if you spend that time, look at it on a macro level, you'll see that there's a great deal of value in knowing these relationships.
And because they are leading you to a long-term trend following directional bias using higher timeframe daily charts, it will give you confidence as a trader to know that you're trading with the underlying fundamentals, and you don't really require all of that time and energy and diligence needed to go through fundamental data. The relationships between these markets, as we outlined in this presentation, are very important. will take you to the same outcome that fundamental data will give you. Just like the relationships here will sometimes lag, that same lagging effect that happens in the fundamental data.
I knew this much about fundamental data. Just because the fundamentals suggest something should be bullish doesn't mean tomorrow it's going to go straight up. There's going to be time that has to be built in for that market to start building in a bullish tendency, and then it'll start to move higher.
But long-term macro trends... OK, you can see when they're starting and shifting and moving into place by using the information that we shared in this presentation. So, again, study it. Believe me when I tell you the information in this is worth its weight in gold. It's not something that is sexy.
It's not a lot of charts where I can show you Judas swings and patterns and all this and that. But it's real information that has a direct relationship to how the markets work as a whole, how they tie together, and it keeps you out of having to look at fundamental data. And if there's anything else that you can't associate with in terms of value, that's enough.
There are so many things out there that you would be wasting, in my opinion, your time going through all that data when you can just simply see what price is telling you. Because price and all these asset classes together as a whole will reflect what the fundamentals are actually doing. Because trained accredited staff at these big institutions, banks, producers, manufacturers, and exporters, they're using that real fundamental data.
They have people that are trained accredited, and they're able to use that information to forecast trends in sales and consumption, all those types of things. And they make their business plans around those data points. I can't keep abreast of all that stuff. There's too many things that's going on in my own personal life, let alone, you know, to keep up with all of the ever-changing things in the marketplace. So if I can look at the price of these asset classes and the relationship between all of all four of them in concert with one another, I will, just like you will, come to the conclusion of what the geopolitical macro trend and dare I say it.
fundamental perspective is on the market as a macro perspective trader. Until next time, wish you good luck and good trading.