Intermarket Analysis: Profiting from Global Market ... Profiting from Global Market Relationships

  • View

  • Download

Embed Size (px)

Text of Intermarket Analysis: Profiting from Global Market ... Profiting from Global Market Relationships

  • IntermarketAnalysis

    Profiting from Global Market Relationships


    John Wiley & Sons, Inc.

    ffirs.qxd 10/31/03 12:31PM Pageiii


  • ffirs.qxd 10/31/03 12:31PM Pageiii

  • IntermarketAnalysis

    ffirs.qxd 10/31/03 12:31 PM Page i

  • Founded in 1807, John Wiley & Sons is the oldest independent publishingcompany in the United States. With offices in North America, Europe, Aus-tralia, and Asia, Wiley is globally committed to developing and marketingprint and electronic products and services for our customers professionaland personal knowledge and understanding.

    The Wiley Trading series features books by traders who have survivedthe markets ever changing temperament and have prosperedsome by re-inventing systems, others by getting back to basics. Whether a novice trader,professional or somewhere in-between, these books will provide the adviceand strategies needed to prosper today and well into the future.

    For a list of available titles, please visit our Web site at

    ffirs.qxd 10/31/03 12:31PM Pageii

  • IntermarketAnalysis

    Profiting from Global Market Relationships


    John Wiley & Sons, Inc.

    ffirs.qxd 10/31/03 12:31PM Pageiii

  • Copyright 2004 by John Murphy. All rights reserved.

    Some of the figures in Chapters 1, 2, and 3 were created by Knight Ridders Tradecenter.Tradecenter is a registered trademark of Knight Ridders Financial Information.

    Published by John Wiley & Sons, Inc., Hoboken, New Jersey.Published simultaneously in Canada.

    No part of this publication may be reproduced, stored in a retrieval system, or transmit-ted in any form or by any means, electronic, mechanical, photocopying, recording, scan-ning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United StatesCopyright Act, without either the prior written permission of the Publisher, or authoriza-tion through payment of the appropriate per-copy fee to the Copyright Clearance Center,Inc., 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-646-8600, or on the web at Requests to the Publisher for permission should beaddressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street,Hoboken, NJ 07030, 201-748-6011, fax 201-748-6008, e-mail:

    Limit of Liability/Disclaimer of Warranty: While the publisher and author have used theirbest efforts in preparing this book, they make no representations or warranties withrespect to the accuracy or completeness of the contents of this book and specifically dis-claim any implied warranties of merchantability or fitness for a particular purpose. Nowarranty may be created or extended by sales representatives or written sales materials.The advice and strategies contained herein may not be suitable for your situation. Youshould consult with a professional where appropriate. Neither the publisher nor authorshall be liable for any loss of profit or any other commercial damages, including but notlimited to special, incidental, consequential, or other damages.

    For general information on our other products and services, or technical support, pleasecontact our Customer Care Department within the United States at 800-762-2974, outsidethe United States at 317-572-3993 or fax 317-572-4002.

    Wiley also publishes its books in a variety of electronic formats. Some content thatappears in print may not be available in electronic books.

    For more information about Wiley products, visit our web site at

    ISBN: 0-471-02329-9

    Printed in the United States of America.

    10 9 8 7 6 5 4 3 2 1

    ffirs.qxd 10/31/03 12:31 PM Page iv


  • To Anne, a great poet


    to Tim, a great brother

    ffirs.qxd 10/31/03 12:31 PM Page v

  • ffirs.qxd 10/31/03 12:31 PM Page vi

  • vii

    Acknowledgments ix

    Introduction to Intermarket Analysis xi

    1. A Review of the 1980s 1

    2. 1990 and the First Persian Gulf War 17

    3. The Stealth Bear Market of 1994 33

    4. The 1997 Asian Currency Crisis and Deflation 51

    5. 1999 Intermarket Trends Leading to Market Top 65

    6. Review of Intermarket Principles 81

    7. The NASDAQ Bubble Bursts in 2000 97

    8. Intermarket Picture in Spring 2003 115

    9. Falling Dollar During 2002 Boosts Commodities 131

    10. Shifting from Paper to Hard Assets 145

    11. Futures Markets and Asset Allocation 159

    12. Intermarket Analysis and the Business Cycle 179

    13. The Impact of the Business Cycle on Market Sectors 199

    14. Diversifying with Real Estate 217

    15. Thinking Globally 235

    Appendix 247

    Index 263


    ftoc.qxd 10/31/03 12:35 PM Page vii

  • ftoc.qxd 10/31/03 12:35 PM Page viii

  • ix

    Iowe thanks to a lot of people who helped put this book together: Pamelavan Giessen, Executive Editor at Wiley, for talking me into doing it in thefirst place; Jennifer MacDonald and Joanna Pomeranz for making surethat everything wound up in the right place; Heidi Shelton and Pete Behmerat for producing great looking charts; John Carder atTopline Investment Graphics for his innovative historical charts; Tim Murphyfor his help with the cover design and computer graphics; those market ana-lysts who generously allowed me to draw from their work including NedDavis, Ken Fisher, Ian Gordon, Martin Pring, and Sam Stovall. And, finally,the McTooles family who kept my spirits up while I was writing this book.


    flast.qxd 10/31/03 12:33 PM Page ix

  • flast.qxd 10/31/03 12:33 PM Page x

  • xi

    In 1990, I completed a book entitled Intermarket Technical Analysis:Trading Strategies for the Global Stock, Bond, Commodity, and Cur-rency Markets. My point in writing it was to show how closely related allthe financial markets really are, both domestically and internationally. Thebooks main thesis was that technical analysts need to broaden their chartfocus to take these intermarket correlations into consideration. Analysis ofthe stock market, for example, without consideration of existing trends in thedollar, bond, and commodity markets was simply incomplete. The book sug-gested that financial markets can be used as leading indicators of other mar-kets and, at times, confirming indicators of related markets. Because themessage of my earlier text challenged the single market focus of the techni-cal community, some questioned whether this newer approach had any placein the technical field. Many questioned whether intermarket relationshipsexisted at alland whether they could be used in the forecasting process. Theidea that global markets are linked to each other was also viewed with someskepticism. How things have changed in just one decade.

    Intermarket analysis is now considered a branch of technical analysis andis becoming increasingly popular. The Journal of Technical Analysis (SummerAutumn 2002) asked the membership of the Market Technicians Association torate the relative importance of technical disciplines for an academic course ontechnical analysis. Of the fourteen disciplines included in the poll, intermarketanalysis ranked fifth. Intermarket work has come a long way in ten years.


    My earlier text focused on events in the 1980s starting with the end of thecommodity bubble at the start of that decade. This ended the hyperinflation of

    Introductionto Intermarket


    flast.qxd 10/31/03 12:33 PM Page xi


    the 1970s when hard assets like commodities soared and paper assets (likebonds and stocks) soured. The 1980 peak in commodities ushered in a two-decade disinflationary trend that coincided with major bull markets in bondsand stocks. The biggest financial event of the 1980sthe 1987 stock marketcrashprovided a textbook example of how markets are related to eachother and the necessity for paying attention to those related markets. A surgein commodity pricesand a collapse in bond pricesduring the first half of1987 gave ample warning of an impending stock market decline during thatyears second half. Three years later during 1990, as the previous book wasgoing to press, global financial markets were just starting to react to Iraqsinvasion of Kuwait in August of that year. Gold and oil prices surgedwhilestock markets around the world fell. Interestingly, thirteen years later (at thestart of 2003), market observers were facing the prospect of another Iraq warand were studying anew the 19901991 market reactions to look for parallels.History has a way of repeating itself, even in intermarket work.


    Another important event which happened at the start of 1990 is still havingglobal repercussions more than a decade later. The bubble in the Japanesestock market burst. This started a thirteen-year descent in that market (whichrepresented the worlds second largest economy) that turned into a defla-tion (a decline in the prices of goods and services). Over a decade later, west-ern central bankers were studying the Japanese deflation model to find waysto combat increasing signs of deflation in western economies. Some of thecharts presented in this book also bolster the view that Japanese deflationwas one of the major contributing factors to the decoupling of bonds andstocks in the United States years later when rising bond prices starting in2000 coincided with falling stock prices.


    March 10, 2003 marked the third anniversary of the ending of the Nasdaqbubble that signaled the start of the worst b