Inter-market Analysis

Inter-market Analysis

Inter-market analysis is a method of determining the strength or weakness of an asset class or financial market relative to other related asset classes or financial markets. These asset classes may include stocks, bonds, commodities, or even loan facilities. The method focuses on comparing asset classes instead of individual assets. The overall goal of the inter-market analysis is to identify top performers or the markets that are outperforming others. Such comparisons can be very useful to investors as they seek to maximize their wealth.

Breaking Down Inter-market Analysis

Intermarket analysis is actually a small area within the larger field of technical analysis. It involves detailed study of the major asset classes with the aim of identifying market trends, including possible inflections. We can expand this type of analysis to include industry subsectors. For example, the method can be used to compare the 9 sectors that together make up the S&P 500.

It is common to find market analysts comparing the performance of stock markets across international borders. Stock market analysts give due attention to the world’s most developed economies because such economies have a trickle-down effect on smaller ones. As such, trends in these markets often reflect in the smaller markets almost simultaneously. Such markets may include the London, New York, and Beijing stock exchanges.

Inflection points in one market may serve as a warning of an imminent change in trend in a different but closely related market. One of the tools used to study inter-market relationships is the relative strength analysis.

Relative strength analysis draws a direct comparison between prices of two securities. The method involves dividing the price of one security by the price of another security and then presenting the results in form of a chart.

Why Is Inter-market Analysis Important?

Trade veterans will always tell you how important it is to have a diversified portfolio. Such a portfolio is not limited to just one asset class or country. Diversification reduces the overall risk borne by the investor. A diversified portfolio is a direct beneficiary of the inter-market analysis. By keeping an eye on multiple markets, investors can detect significant market changes earlier than their counterparts who focus on just one market. The investor with an inter-market strategy can then move holdings from one sector or country to another so as to dodge avoidable economic downturns and maximize their wealth.

Reading 56 LOS 56h:

Describe inter-market analysis as it relates to technical analysis and asset allocation.

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