Intermarket Analysis – Putting It Together

Imagine if you will the “Global Commodities Market” much like you would your local farmers market. Vendors from far and wide, there with their goods on display and priced to sell. You’ve got corn, sugar, coffee, wheat, beef, gold, silver, copper, oil and even some live cattle there in the back. Everything a person (or a nation) could ever need, all there in tidy rows – neat and organized, ready to go.

Only thing is  – you’ll have to make a quick little stop to see me at the “foreign exchange window” before heading in……….. as you guessed it – all items are priced in U.S dollars.

With global trade in the trillions of U.S. dollars every year – and this “market” paying  taxes to the U.S. government. It’s a pretty good system for the U.S don’t you think? – Not to mention my little “currency exchange” on entry – (I’ll save this for another post and topic entirely).

The U.S. dollar and commodity prices generally trend in opposite directions. As the dollar declines (relative to other currencies)  the reaction can be seen in commodity prices.

Commodity prices have a direct effect on bond prices. As commodity prices escalate in an inflationary environment – so in turn interest rates rise to reflect this inflation. Rising interest rates and bond prices (TLT) fall. When bond prices begin to fall, stocks will eventually follow suit and head down as well. As borrowing becomes more expensive and the cost of doing business rises due to inflation, it is reasonable to assume that companies (stocks) will not do as well.

Putting this all together does take some time – but by monitoring even just the USD and the major currency pairs, a couple of commodities such as gold  or silver, the SP 500 and the 20 year bond (TLT) – the average trader at home should be able to get a handle on “what’s really going on”.  I spend my time in the currency window as I strongly believe that moves in other asset classes are first seen here – as the fx market is the largest and most liquid on the planet – dwarfing the daily volume of the NYSE by well over a 100 times.

We can look at a real world example next……..

6 Responses

  1. tfinavia January 8, 2013 / 12:49 pm

    Kong,

    I am wondering what you’re seeing a month to two months far out starting from next week. I read your outlook earlier but I am in confusion to think that earnings are going to be weaker showing slowdown.

    Strong and rising USD and lower equities and metals OR
    Weak and decling USD and strong and higher equities with rebound and rising metals.

    Thanks!

    • Pot Stock Watch January 8, 2013 / 1:17 pm

      Tfinavia.

      The last post in my series on “intermarket analysis” (scheduled for tomorrow) will outline exactly where I see things going in coming months.

      In a general sense – I think we are very close to a stock market “top” – on this next push down in the dollar, and likely final “pop” in U.S equities. I too agree that U.S earnings will likely be a disapointment.

      The precious metals (as always) will likely do what they will do – as / when they do it. Looking long term obviously there will be tremendous gains to be made – but frankly, I don’t trade it short term. Keep tuned in here day to day , and we can watch for tradable turns in equities and metals…but as it stands….I am short the USD.

      • tfinavia January 8, 2013 / 1:27 pm

        If you’re short USD then there is definitely a POP coming in equities! I would rather short that POP then chase metals as there are good chances that metals also have a POP and then gradual sell off along with equities. Thanks so much and good luck!

        • Pot Stock Watch January 8, 2013 / 1:39 pm

          That’s what I am anticipating yes – but I imagine it will be exactly that – A pop in equities.

          But – be careful as the metals could very well run and continue to run as a “flight to safety” trade as well. It is very possible that after the USD bottoms – that both PM’s and the USD could move higher together – for a time.

          Personally – I don’t really include the PM’s in my general analysis – as in trading currencies I have many many trade opportunites presented daily, and considerable means to profit, as opposed to sitting around for 6 months at a time / dead money in metals.

          Food for thought – “invest in metals” – but “trade” currencies and equities no? – Makes sense to me.

  2. tfinavia January 8, 2013 / 4:27 pm

    Very true, metals definitely test my patience! Also it’s very tough to discern what they will do as we have seen recently PMs and USD both were trending down. So, other way around could also come in picture as that has happened before too, specially now that metals have had pretty hefty rinsing in price and sentiments. I hope investing in metals pays off this year as I plan to take that position sometime in the near future. Thanks!

    • Pot Stock Watch January 8, 2013 / 4:33 pm

      Im sure you will do just fine with a long term investment in precious metals – in fact I’m sure you will do great!

      The timing is difficult with the volatility being what it is – but in general, anyone buying gold/silver at these levels today – will be in a very very good postion a year or two out. The correlation with the dollar has been cloudy as of late – but not really out of the ordinary as “they don’t make this easy” right?

      if every day the dollar went down – gold went up, everyone on earth would be a zillionaire! Stick with it and you’ll do great.

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