Given the globalised nature of the financial markets and how risk-on and risk-off trades dictate the flow and movement of funds across various asset classes, intermarket analysis is fast becoming an important analytical and forecasting tool. Any stock market analysis without consideration of macro trends such as the dollar, bond, oil, precious metals and commodity markets is simply incomplete.
In this posting, I have established a few comparative charts between US and Chinese stocks, bonds, oil, commodities, US dollar, Japanese Yen, Australian dollar, Gold and Silver for recent periods when the US stock market declined (risk-off trade) and when it rallied (risk-on trade). There are altogether 5 periods as marked in the S&P chart below used for comparison.
a. Market Pull-Back - A
c. Market Pull-Back - C
d. Market Rally - D
As you can see, there are correlations between asset class movements during risk-on and risk-off periods. When market is in a risk-on mode, stocks rally and oil, commodities and Aussie dollar will rise. Safe haven assets like bonds, US dollar and Japanese yen tend to fall. It is interesting to note that Gold has no longer behaved like a safe haven asset in recent times. During risk-on period, precious metals like Gold and Silver (higher volatility) rally alongside stock markets, and will decline during risk-off period.
Understanding these macro relationships between asset classes will definitely help improve your analysis on stock market trends.
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