lecture 12: intermarket analysis Flashcards

1
Q

The basic premise of intermarket analysis

A

all financial markets are linked in some way

Although the relationships may shift on occasion, they are always present in one form or another

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2
Q

why are all financial markets are linked?

A

because they are all manifestations of the economic cycle

The economic cycle affects a market in one way and another market in another way with all markets impacting each other

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3
Q

The 4 market groups that we will discuss

A

currencies

commodities

bonds

stocks

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4
Q

Stock v.s. Bond Cycle

all the phases

A

Phase 1: Bonds up, stocks down

Phase 2: Bonds up, stocks up

Phase 3: Bonds down, stocks up

Phase 4: Bonds down, stocks down

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5
Q

Phase 1: Bonds up, stocks down

A

When the economy is weak, bonds usually do better than stocks for a while because the earnings environment is poor

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6
Q

Phase 2: Bonds up, stocks up

A

Then stocks start to move up because lower interest rates get investors to buy in anticipation of an improved economy and therefore, better earnings.

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7
Q

Phase 3: Bonds down, stocks up

A

Later the economy is actually strengthening, with increased credit demand and improved pricing and earnings are rising

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8
Q

Phase 4: Bonds down, stocks down

A

Eventually, higher interest rates cause investors to be concerned that economic activity will slow down and therefore, earnings will soon weaken

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9
Q

When looking at commodities, why do we always look first to gold?

what is a more representative benchmark to use?

A

because it is a leading indicator and a gauge of expected inflation

a more representative benchmark would be to use the CRB Index

Oil is also a good proxy for commodities

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10
Q

relationship between bond prices and commodities

A

inverse relationship

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11
Q

Rising commodity prices (as measured by the CRB index) mean what?

A

an indication of economic strength

an early inflation warning that would push interest rates higher (bond prices lower)

thus also offering an early warning to stock trader

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12
Q

A ↑ USD means what?

A

a decrease in future inflation, resulting in commodities selling off, which is in turn good for the bond and stock markets

negative for commodities since many commodities are priced in USD

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13
Q

A ↑ in the CRB index means what?

A

generally bad for the bond and stock markets as it signals increased inflation and possible increases in interest rates

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14
Q

that the inverse relationship between commodities and bonds & stocks holds true during inflationary & disinflationary periods, but not necessarily during deflationary periods

why?

A

In a deflationary environment, decreasing commodities are generally positive for bonds, but not necessarily good for stocks

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15
Q

Disinflationary scenario: Commodities ↓

A

Bonds ↑
Stocks ↑

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16
Q

Deflationary scenario: Commodities ↓

A

Bonds ↑
Stocks ↓

17
Q

When USD ↓, multinational earnings ↑ because

A

↓ USD means that US goods are more attractive overseas

Products sold overseas (example, Europe) will have to be converted back into a weaker USD which in turn results in a bigger bottom line.

18
Q

When the USD ↓, drug stocks tend to do well, because

A

Most of their sales are derived overseas. So when the market is weak, they tend to outperform the other sectors as a result.

This goes beyond the fact that they are defensive in nature