The monthly S&P500 Emini futures candlestick chart has not had a pullback in 14 months. This has...
Using Intermarket Analysis to Find Good Trades
12/15/2012 8:00 am EST
Intermarket analysis helps you find better perspective and get global awareness beyond the market you trade, says technician Corey Rosenbloom.
My guest today is Corey Rosenbloom, and we are talking about intermarket analysis and how you use it to find good trades; so Corey, let’s define—first of all—intermarket analysis.
In a general sense, intermarket analysis plays to different relationships in markets; so those that trade together—that are correlated together—or those that are not correlated; so for example; bonds travel one direction, stocks travel the other. In an environment where risk is coming off of the markets or off the table—those that are positioning in a bearish or a risk-adverse environment—we would generally see bonds rise; the dollar and commodities fall. Actually, with the stocks, the commodities fall. The dollar would actually rise with the bonds so we would be looking at risk-on, risk-off. It helps you to provide a different perspective and get a global awareness of markets beyond the one you might trade. For example, if you are just an equity trader, looking at stocks is helpful but also seeing a rising trend and rising momentum or rising prices in the other related risk-on markets—oil, silver, and other commodities—that may help you with confidence in putting out positions in the stock market that you might not other have without that.
All right; so let me ask you this. If something is normally correlated well or not correlated—in this case, let’s talk about the US dollar in the stock market. If they normally move in opposite directions but they don’t for some reason, do you then trade one; go long and short the other; hopefully at some point that will start to happen again?
That can mean an arbitrage opportunity. It can be done. What we like to look at are for the trades that travel in the opposite direction because it helps with the analysis; but traders actually can do that. When an intermarket relationship breaks down, it usually does so temporarily. It is often not a permanent shift especially larger, salient relationships over years, not just months; so yes, they do tend to trade back to—let’s say—normalcy; or back to their original relationships but there are times at arbitrage to take advantage of that, and traders can say short a market that is rising and also buy one that is falling and try to get the correlation where they come back together and typically, they do so.
Right; now we’re recording this toward the end of 2012, so talk about some of the intermarket analysis relationships that you’ve been watching lately.
It is actually a good interesting point for this going into the end of the year. We are seeing some interesting relationships—some salient relationships—short term fall apart. For example the last few weeks—just as an example—gold has been rallying as has the dollar. Stocks have been falling; gold is rallying with the markets; so we are seeing a lot of different things that should not be happening especially gold-dollar. That is what I am watching very closely. One of those markets is out of sync, and I think the stock market is falling much sharper than the other markets you are actually calling for. I’ve got my eye on how gold and the dollar are trading together that is very abnormal currently.
What do you think is causing that?
The market; with the quantitative easing; with Operation Twist, we have different central bank interventions. We have programs going on, specifically designed to affect the markets. Historically—at least in the past—we’ve had quantitative easing where the Federal Reserve is injecting stimulus in the markets by purchasing Treasuries; so they are essentially providing support for the Treasury market by purchasing them with the goal being to decrease Treasury rates to make yields lower. This has been bullish for stocks. It has been bullish for commodities because it is an inflationary play. It has been bearish for the dollar, and of course, bearish for bonds so what we are looking at is now that QE 3 has taken place, the dollar is actually rising and stocks are falling. Gold is holding its own but still there are some intermarket relationships that are not holding up as they did under the conditions of QE1 and QE2. That’s got me very interested in seeing how these fall apart; if they continue to be out of the ordinary or if they actually go back to the way they should.
All right and then finally, if the dollar and gold are correlated right now, which one do you short in hoping that it is going to change?
Ah, interesting. Gold; this is a very difficult situation because you’re looking at quantitative easing. It is bearish for the dollar and they are increasing supply of the dollars to purchase Treasuries. That is bearish for the dollar. It is bullish for gold; yet we are seeing the dollar rally in the context of the market where supply—or if someone said the quantitative easing is actually helping—where we hurt the dollar normally, it is actually boosting it; but the other thing is stocks are falling very sharply with their worry toward the fiscal cliff. As of this recording it is after the Presidential election, we will see stocks fall almost every single day. In that same context, gold has rallied; so has the dollar. That is puzzling; and crude oil really has stabilized, too, so these factors need to either go back the way they originally were or we could be looking at something very, very odd; very distinguished. It would go in the end of the year in terms of these breakdowns in normal relationships. Traders should be very aware of this.
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