Relationship of markets to each other

Discussion in 'Trading' started by silverware, Aug 30, 2007.

  1. Dear Elite community,
    I am trying to develop a strategy that focuses on longer-term (about a month) moves in the financial markets. I have two questions:
    1. Could there be a scenario where one of these markets moved significantly and the others did not? Or, will a significant move in one always cause a significant move in the other?


    US dollar

    2. What is the general (or usual) relationship between the following markets?

    If stocks are up, bonds are ____ ?
    If bonds are up, gold is _______?
    If the dollar is up, bonds are ________?
    If stocks are up, gold is ________?

    Thanks for your help as I am not an economist
  2. Check John Murphy's work. He's big on "inter-market" relationships.
  3. There is no "usual" relationship other than sometimes they move in tandem, sometimes they diverge.
  4. Actually, my main issue is one of movement in one market impacting all of them. I am not looking for a inter-market relationship per se. Could there be a situation in which bonds/gold/stocks etc. would move and the other markets would remain basically unchanged? I
  5. I've found no real "definite" thing is to become literally "consumed" with one contract...ES, CL, bonds etc...adn study it and study it and study it!!...bill

  7. Read Ken Fishers new book "The Only Three Questions That Count" regarding the correlation of various things.

    He also brings up other related topics like how hedging currency risk over time is not necessary but I'll save that for you to read.

    Fisher does a very good job applying his questions to complex problems, including some that are controversial in their conclusions. In his case against an inverse correlation between Stocks and Oil, Fisher finds an R-Square Value of 0.01 – that only 1% of a Stock indices price changes are connected to Oil. In general Fisher's new book is a good resource to take a look at.
  8. Gyles


    Though, stocks and bonds have different meanings and workings in the market. They do have a relationship. It seems that if market is not good, people might prefer Bonds as they are safer. If the market is on the upswing and companies are profitable then stocks might be in demand.

    I think it all depends on the investor and the risk he/she is willing to take. Moreover, inter-market analysis is not an easy subject.

    Some links are as follows:

    - PKT message, Re: Stock vs bond markets (was: Waiting for...)
    - The Advantage of Intermarket Analysis

    Simply stated, inter-market analysis is the comparison between markets price movements, generally via charts.

    Its features are:
    1. It helps the investor to understand the market movements and its reversals too, like the “Dow Theory”
    2. It also guides you in the relationship between the interest rates and stock market
    3. It also guides in the comparison between: “Commodity Market Vs Interest Rate Market”, “Gold/Silver Stock Index (XAU) Vs “Price of Gold”
      If you wish to understand better, I think the following post in ET is real enlightening:

      Intermarket Analysis

      But, I really wish if some charts could be posted as that would make the picture all the more clearer.
  9. Bonds and stocks aren't really directly related to each other, the interest rates are what actually motivates price movement in both stocks and bonds.

    For instance, if a bond sells at "par" value of 1,000, and the current interest rates are 7% and the bond is at 7%, it is "fairly" priced.

    If the interest rates rise, the bond selling at 7% is now underpriced. To compensate for that underpricing, the value of the bond will rise above 1,000 (depending on the terms of course). So now that bond sells at a premium to make the Yield To Maturity equal to the current interest rates.

    Now conversely, stockholders will gauge the interest rates, and if they are historically high, or moving up, bonds will become more attractive because of their capital gains opportunities and higher yield to maturities.

    Additionally, higher interest rates mean less profits for companies as they are required to pay a higher interest rate to secure any debt for future growth. So with the combination of attractive bond yields and lower growth opportunities, the price of stocks will decline.

    So you see, stocks and bonds are not influencing each other, but instead, the interest rates are influencing investor decisions.
  10. no,no, consumed with only ONE!!
    #10     Sep 10, 2007