Well, they are not working as well as I originally thought. I am more comfortable using 3 years as my look-back period. Still, I’ll keep an eye out for the 6 months signals just in case.
Hi Rookie,
you wrote to BB about the COT index signals. I made some trades on it so I have some thoughts. I do not know though the COT Index 3 years signal to trade as I only traded the 6 months signals. So, my experience is that it works good but only in the direction of the trend. It does not work at all against the trend. I have to reread now BBs post as I checked sugar on timingcharts.com. I know their data is not that good as our analysis (it differs with small things) but good enough to see if we are near to something. We are almost at net position extreme and there is a COT index 6 months buy signal which is not valid because it is not inline with the trend.
You also mentioned daily charts to do historical analysis. I use the weekly charts for two reasons: I cannot take a print screen from 3 years of data with a daily TF (I see only 1 year of data on my screen. If I make more candlestick on my screen, I cannot see it in detail and that makes no sense to me). Besides that, I also use the weekly chart because IMO it makes more sense as my charts and graphs also only have weekly values from the COT report. But I might be wrong so we can discuss this.
FE
Hi FE,
I keep asking the same questions about 6 months COT signal, I’m still confused. I know you have explained this to me before. I’ll be back with some charts on that later to see if I can make sense of anything.
And on using daily chart, I do agree with both of your reasoning I actually thought right about the same and was going to use weekly but changed it to daily because I thought that way I would be able to spot the signals with more clarity even though I admit the chart is a little crowded.
[B]Hey guys![/B]
I decided to make a recap of John Murphy’s Intermarket Analysis because there are so many new information in the book that it’s hard to keep track all of them. As I’m moving forward in the book, I’ll continue to create these recaps. I believe that COT report and Intermarket analysis could and should be performed together to come up with more accurate signals.
Hopefully, [B]Peter[/B] is going to read them and correct me if I wrote a mistake or did not manage to fully understand something.
Here it goes!
[B]Basic premises of Intermarket analysis[/B]
[ul]
[li]All markets are interrelated; markets don’t move in isolation.
[/li][li]Intermarket work provides important background data.
[/li][li]Intermarket work uses external, as opposed to internal, data.
[/li][li]Technical analysis is the preferred vehicle.
[/li][li]Heavy emphasis is placed on the futures markets.
[/li][li]Futures-oriented technical indicators are employed.
[/li][/ul]
Basically, we are going to analyze various markets and their influence on each other.
[B]Key Relationships[/B]
[ul]
[li]Action within commodity groups, such as the relationship of gold to platinum or crude to heating oil.
[/li][li]Action between related commodity groups, such as that between the precious
[/li]metals and energy markets.
[li]The relationship between the CRB Index and the various commodity groups and
[/li]markets.
[li]The inverse relationship between commodities and bonds.
[/li][li]The positive relationship between bonds and the stock market.
[/li][li]The inverse relationship between the U.S. dollar and the various commodity markets, in particular the gold market.
[/li][li]The relationship between various futures markets and related stock market groups, for example, gold versus gold mining shares.
[/li][li]U.S. bonds and stocks versus overseas bond and stock markets.
[/li][li]Bond prices and commodities usually trend in opposite directions.
[/li][li]Bonds usually trend in the same direction as stocks. Any serious divergence between bonds and stocks usually warns of a possible trend reversal in stocks.
[/li][li]A falling dollar will eventually cause commodity prices to rally which in turn will have a bearish impact on bonds and stocks. Conversely, a rising dollar will eventually cause commodity prices to weaken which is bullish for bonds and stocks.
[/li][/ul]
[b]Rising Commodity prices[/B] = Inflationary (usually accompanied by rising interest rates)
[B]Decreasing Commodity prices[/B] = Noninflationary (usually accompanied by decreasing interest rates)
[I]According the the statements above, we are currently experiencing a Noninflationary economical period. Are we? I hope [B]Peter[/B] would jump in to give a little explanation on the situation we are in.[/I]
An important point which used to confuse me: Commodity markets trend in the same direction as Treasury bond yields and in the opposite direction of bond prices.
[B]From the book[/B]
During a period of economic expansion, demand for raw materials increases along with the demand for money to fuel the economic expansion. As a result prices of commodities rise along with the price of money (interest rates). A period of rising commodity prices arouses fears of inflation which prompts monetary authorities to raise interest rates to combat that inflation. Eventually, the rise in interest rates chokes off the economic expansion which leads to the inevitable economic slowdown and recession. During the recession demand for raw materials and money decreases, resulting in lower commodity prices and interest rates.
I found that part to be exceptionally interesting. I read it probably 10 times already and I’m still having a hard time grasping it.
[B]T-bill[/B]: A short-term debt obligation backed by the U.S. government with a maturity of less than one year.
[B]T-note[/B]: A longer-term debt obligation backed by the U.S. government with a maturity of more than 10 years.
I don’t know about you guys, but I think it would be awesome to combine COT report with Intermarket analysis. At least to filter our trades.
Well, that’s part I. More coming soon.
BB, its good to see you’re doing recaps and immersing yourself with the subject : Intermarket analysis. That book needs several reads. Peter got us on the subject with the reverse relationship between CRB and Dollar index. I had been amazed since then.
Well Peter has been away. I’ll answer your questions from what I know. Yes we are in a period where there’s no inflationary pressure - further declining commodity prices especially oil - there comes a fear of deflation. Apparently there’s a term for the condition that we’re currently in - lowflation.
Most of Central banks have fallen short of their target inflation rate. And falling oil price is not helping the situation any better - is actually causing a sharp drop in headline inflation figures in which some Central banks have referred as benign disinflationary period. This fall in the price of oil has a significant impact in reducing transport and other business costs. Therefore with falling oil prices we pay less than we used to - lower inflation.
I mentioned fear of deflation, if falling oil prices are due to weak global demand is a sign that global economy is experiencing weaker growth figures. Look at Japan and EU, Japan has officially gone into recession EU is struggling with ever increasing deflationary pressure. And China I could go on more. I wonder if declining oil and commodity just in general is after all as benign as some ‘central banks’ had claimed it to be.
Later in chapters you’ll have an idea what to trade or invest in times of deflationary or inflationary period. He even picks out sectors of stocks in which you can invest in either of these conditions. How certain industries perform better than the other in either deflationary or inflationary period.
I especially liked how you could use intermarket analysis as a way to foresee future economic outlook , he points out to watch out for benchmark indexes and says that they are followed around the globe for a reason. And how you could compare S&P 500 with different sectors to foresee possible breakdowns or months of rallies. Peter has been contributing some valuable posts on the subject.
And yes intermarket analysis is a breakthrough overtaking every form of analysis and I was surprised to find out that its considered a form of technical analysis. While economic indicators print the bad numbers when its already had happened intermarket analysis lets us in on hints on possible financial meltdowns therefore it can also be seen as a leading indicator for future economic outlook.
Bonds VS Stocks
Rising Interest rates (Decreasing bond prices) - Bearish for stocks
Falling Interest rates (Increasing bond prices) - Bullish for stocks
Well, that is generally the case. Of course, the course of action-reaction is more complex than that.
Here’s a recent chart with the S&P 500 and 30 Years Treasury Bonds
It’s when the two markets begin to trend in opposite directions that analysts should begin to worry. An important point to keep in mind.
The bond market usually turns first. Near market tops, the bond market will usually turn down first. At market bottoms, the bond market will usually turn up first. This might be an indication for a possible setup market.
The part got me a little confused, I hope Peter will be able to aid me.
Short-term Interest rate markets and the Bond market.
Inverted yield curve: Short term interest rates exceed long-term rates (I’m not sure what does that mean. I’m guessing that T-bill yields are higher than T-bond yields. Peter?). This situation is bearish for stocks. The normal situation is a positive yield curve, where long-term bond yields exceed short-term market rates. In general, when T-bill futures are rising faster than bond futures, a period of monetary ease is in place, which is considered supportive to stocks. When T-bill futures are dropping faster than bond prices, a period of tightness is being pursued, which is potentially bearish for stocks.
T-bill yields > T-bond yields = bearish for stocks | T-bill prices < T-bond yields = bearish for stocks
T-bill yields < T-bond yields = bullish for stocks | T-bill prices > T-bond yields = bullish for stocks
Is that correct?
It’s not always necessary that the bond and stock markets trend in the same direction. What’s most important is that they don’t trend in opposite directions. In other words if a bond market decline begins to level off, that stability might be enough to push stock prices higher. A severe bond market sell-off might not actually push stock prices lower but might stall the stock market advance. It’s important to realize that the two markets may not always move in lockstep. However, it’s rare when the impact of the bond market on the stock market is nonexistent.
Business Cycle
“The bond market is considered an excellent leading indicator of the U.S. economy. A rising bond market presages economic strength. A weak bond market usually provides a leading indication of an economic downturn (although the lead times can be quite long). The stock market benefits from economic expansion and weakens during times of economic recession. Both bonds and stocks are considered leading indicators of the economy. They usually turn down prior to a recession and bottom out after the economy is well into a recession. Tops in the bond market, which usually give earlier warnings of an impending recession, are generally associated with rising commodity markets. Conversely, during a recession falling commodity markets are usually associated with a bottom in the bond market.”
Another key point. That is all for part II.
Hi BB,
very nice writing. I am also not Peter but I also answer.
There is only one point where I question your writing, but in that point you wrote yourself you are not sure. It is about bonds. I would suggest that we start using in our thread [I]bond price[/I] and [I]bond yields[/I] and never only bonds as it can be misleading. The book mentions about the new and old relationship between stocks and bonds. I do not know how often it will still change in the book but where I am now they have an inverse relationship. In the [I]old normal[/I] they had a positive relationship and in the [I]new normal[/I] they were decoupling.
It is also not that easy to define if we are in [I]deflationary[/I] or [I]low inflationary[/I] market conditions. It depends where. Some countries in trouble might have hyperinflation, US or Austrlation economy is low inflation and Japan has deflation. But I guess you wanted to talk about generally the 8 main currencies we follow so there is mostly low inflation.
Rookie actually wrote a nice post about inflation. Especially the last paragraphs is good. Sounds a bit like little-Peter. The key is in the post what Murphy also discussed in his TA book, that reports are the past. We are interested in the future. So what I am interested in at the moment is the USD. Everyone is buying it as the US economy is strong. What is interesting though that because of strong USD, we know now all commodity prices went down. It is because of low inflation. We also know the lag in economic indicators. So the intersting part for me is, as were are coming to very cheap levels in commodities and the US economy is very strong, sometime the demand has to pick up for commodities and despite the strong US economny, USD has to weaken as commodity prices will start rising. I do not know exactly when this moment comes of course but I can imagine how many retails traders will lose all their many as they will think: “Cool, I can buy USD for a better price!” Yes they can, only they might be a bit too late.
So we will wait for Peter the Great to discuss the issue when he is back,
FE
Thanks for the help, Rookie. The topic is indeed fascinating, if a little hard to understand 
If there’s any truth to the things I’ve just learnt from the book, T-bond prices will likely take a downturn before the S&P and DJIA collapse.
I wonder if US economic growth has already been priced in on S&P.
Apparently S&P has been on an uptrend since 2009
I checked Russell 2000 since 5 Dec there wasn’t any new highs.
Increasing deflationary pressure and global slow down is going to weigh on US economy it may well already be weighing on.
Hi Mike,
I have something for you: Currency Strength Meter
You can tell you opinion if you find it useful or not. If yes, you can compare it to your own daily findings. I think it would be a good use to you. If you are getting lazy, you can just grab this and post it. However it does not have pip standings like your stats. If you do not like it, just ignore it.
Hopefully you talk to us,
FE
Hey guys.
Monday’s results.
(I’ll look at that as soon as I’m done posting now FE)
JPY : +7 -0 0///+3 -0 0
GBP: +6 -1 0///+3 -0 0
EUR: +4 -2 1///+3 -0 0
EUR: +4 -2 1///+3 -0 0
USD: +2 -4 1///+2 -0 1
AUD: +2 -4 1///+0 -4 1
CAD: +0 -6 1///+0 -5 0
NZD: +0 -6 1///+0 -5 0
Majors took this one. +14
Ok FE.
Looks good. What I did is take a snap shot of that table now. And immediately took one of my other one.
Let’s compare.
Hey FE.
Well, after reading about it and looking at it…I don’t know. First of all I don’t see any kind of correlation between the 2 shots taken above. And also they don’t fully explain how they come up the calculations.
Hmmmmm…
Cool web site though. I’ll look at all they have.
Thanks!
Mike
In this recap, we will examine the relationship between the Dollar (USD Index) and Commodity (CRB Index) market.
In his book, Mr Murphy tells us a way to start our intermarket analysis: Dollar -> Commodity Markets -> Bond markets -> Stock markets.
The Dollar moves inversely with Commodity prices.
Rising Dollar = Noninflationary
A rising dollar eventually produces lower commodity prices. Lower commodity prices, in turn, lead to lower interest rates and higher bond prices. Higher bond prices are bullish for stocks.
USDX - CRB
A falling dollar becomes bearish for bonds and stocks when commodity prices start to rise. Conversely, a rising dollar becomes bullish for bonds and stocks when commodity prices start to drop. A rising dollar is bearish for the CRB Index, and a falling dollar is bullish for the CRB Index. The second important point is that turns in the dollar occur before turns in the CRB Index.
USD - CRB - Bonds
There’s a problem though. Although Dollar strength is bearish for Commodities, the lag time is still there. According to the book, the solution is Gold. Not only it is extremely sensitive to Dollar Index, it leads the CRB Index.
Gold - CRB
A trend change in the dollar will produce a trend change in gold, in the opposite direction, almost immediately. This trend change in the gold market will eventually begin to spill over into the general commodity price level.
Foreign Currencies and Gold
As the dollar falls, foreign currencies rise. Therefore, foreign currencies and gold should trend in the same direction.
Although the Deutsche Mark was examined in the book, I think Euro or Japanese Yen would suffice.
Summarry from Intermarket Analysis
“The relationship between the U.S. dollar and bonds and stocks is an indirect one. The more direct relationship exists between the U.S. dollar and the CRB Index, which in turn impacts on bonds and stocks. The dollar moves in the opposite direction of the CRB Index. A falling dollar, being inflationary, will eventually push the CRB Index higher. A rising dollar, being noninflationary, will eventually push the CRB Index lower. The bullish impact of a rising dollar on bonds and stocks is felt when the commodity markets start to decline. The bearish impact of a falling dollar on bonds and stocks is felt when commodities start to rise. Gold is the commodity market most sensitive to dollar movements and usuallym trends in the opposite direction of the U.S. currency. The gold market leads turns in the CRB Index by about four months (at major turning points, the lead time has averaged about a year) and provides a bridge between the dollar and the commodity index. Foreign currency markets correspond closely with movements in gold and can often be used as a leading indicator for the CRB Index. In the next chapter, a mere direct examination of the relationship between the dollar, interest rates, and the stock market will be given. A comparison of the CRB Index to the stock market will also be made to see if any convincing link exists between the two. Having already considered the important impact the dollar has on the gold market, the interplay between the gold market and the stock market will be viewed.”
Hi guys!!
Well I just got caught up with all your fabulous write ups on intermarket relationships.
Now this stuff is very very interesting to me. I’m really excited about it. And I should be getting my book any day now.
Keep this stuff coming!!!
Mike
“Copper is an excellent indicator of the strength or weakness of the global economy”
“Falling commodity prices also suggests that we’re in a disinflationary period”
Its much more interesting than macro economics I bet ! 
Hi guys,
just had time to have a look around, some great posts re Intermarket.
Some action in that quarter at present - Russell 2000 falling heavily yesterday was an indicator of some ‘risk off’ in the wind - see it has spread to ftse.
Not surprisingly when there is risk off up goes Gold.
Hi Peter,
great to have you back!
Team,
if someone has open JPY short trades, it might not be bad to protect profits. We will get a better price later on.
FE