Itech lecture 12 Flashcards
What is the basic premise of intermarket analysis
all financial markets are linked in some way
How are all financial markets linked?
Because they all are all manifestations of the economic cycle
What are the 4 market groups in intermarket analysis
1) currencies
2) commodities
3) bonds
4) stocks
**What is said about the relationship between bond and stock prices
Bond prices always lead stock prices
What is phase 1 between stocks and bonds, explain
Bonds up, stocks down
-when economy is weak, bonds do better than stocks for a while because the earnings environment is poor
What is phase 2 between stocks and bonds, explain
Bonds up, stocks up
-stocks start to move up because lower interest rate
What is phase 3 between stocks and bonds, explain
Bonds down, stocks up
-economy is getting stronger, increase credit demand and improved pricing and earnings are rising
What is phase 4 between stocks and bonds, explain
Bonds down, stocks down
-higher interest rates cause investors to be concerned that economic activity will slow down
When looking at commodities, we always look at what first and why?
Look at gold first because it is a leading indicator and a gauge of expected inflation
What is the better representative compared to gold?
the CBR index or oil
**What is the relationship between bond prices and commodities
Inverse relationship
What does rising commodity prices indicate
indication of economic strength and is an early inflation warning that pushes interest rates higher and thus which offers a early warning to stock traders
If appreciation for USD in commodities goes up, what does this mean?
Signals a decrease in future inflation, resulting in commodities selling off, which is good for the bond and stock market
What does a rising USD mean for commodities
negative for commodities since many commodities are priced in USD
An appreciation in the CRB index means what for bond and stock market
generally bad for bond and stock markets as it signals increased inflation and possible increases in interest rates
When does the inverse relationship between commodities and bonds & stocks hold true?
During inflationary and disinflationary periods
When does the inverse relationship between commodities and bonds & stocks NOT hold true?
During deflationary
Give the sequence of events in a disinflationary scenario for commodities, bonds and stocks
Commodities go down
Bonds go up
stocks go up
Give the sequence of events in a deflationary scenario for commodities, bonds and stocks
Commodities go down
Bonds go down
Stocks go down
When USD goes down, multinational earnings go…? How come?
Up
-because this means that products overseas are more attractive
When USD goes up, drug stocks tend to go…? How come?
Up
-since most their sales are from overseas, when the market is weak they tend to outperform the other sectors as a result
Small caps are … as impacted by currency swings as the large caps
not
Increase in USD favours who
Small caps
Decrease in USD favours who
large caps
What is said about how bond prices and stocks prices together
They move in the same direction
**Who moves first, stocks or bonds
Bonds
Commodities trend in which direction compared to bond prices
In the opposite direction
USD trends in which direction compared to commodities
In the opposite direction
Increase in USD is good for who
US stocks and bonds
Decrease in USD is bad for
US stocks and bonds
What happens to bonds during periods of deflation
they decouple (bonds up, stocks down)
