If You Can't Be With The Stock You Love, Love The Stock Your With!! (ci)
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As a result, chartists can watch industrial metals prices for clues on the economy and the stock market. Rising prices reflect increasing demand and a healthy economy.
A price rise due to a supply shock is negative for stocks, but a price rise due to rising demand can be positive for stocks. This is also true for industrial metals, which are less susceptible to these supply shocks.
Industrial Metals and Bonds
Not all commodities are created equal. In particular, oil is prone to supply shocks. Unrest in oil producing countries or regions usually causes oil prices to surge.
Bonds benefit from a decline in commodity prices because this reduces inflationary pressures. Stocks can also benefit from a decline in commodity prices because this reduces the costs for raw materials.
Countries with weak economies and big debt burdens are subject to weaker currencies. A rising Dollar puts downward pressure on commodity prices because many commodities are priced in Dollars, such as oil.
What are the effects of a rising Dollar? A countries currency is a reflection of its economy and national balance sheet. Countries with strong economies and strong balance sheets have stronger currencs.
Obviously, a big advance in commodities would be bearish for bonds. By extension, a weak Dollar is also generally bearish for bonds. A weak Dollar acts an economic stimulus by making US exports more competitive. This benefits large multinational stocks that derive a large portion of their sales overseas.
Dollar and Commodities
While the Dollar and currency markets are part of intermarket analysis, the Dollar is a bit of a wild card. As far as stocks are concerned, a weak Dollar is not bearish unless accompanied by a serious advance in commodity prices.
The list below summarizes the key intermarket relationships during a deflationary environment.
An INVERSE relationship between bonds and stocks
A POSITIVE relationship between interest rates and stocks
An INVERSE relationship between commodities and bonds
A POSITIVE relationship between commodities and interest rates
A POSITIVE relationship between stocks and commodities
An INVERSE relationship between the US Dollar and commodities
A rise in bond prices and fall in interest rates increases the deflationary threat and this puts downward pressure on stocks. Conversely, a decline in bond prices and rise in interest rates decreases the deflationary threat and this is positive for stocks.
The intermarket relationships during a deflationary environment are largely the same except for one. Stocks and bonds are inversely correlated during a deflationary environment.
The subsequent threat of global deflation pushed money out of stocks and into bonds. Stocks fell sharply, Treasury bonds rose sharply and US interest rates decline.
Asian central bankers raised interest rates to support their currencies, but high interest rates choked their economies and compounded the problems.
Deflationary Relationships
Murphy notes that the world shifted from an inflationary environment to a deflationary environment around 1998. It started with the collapse of the Thai Baht in the summer of 1997 and quickly spread to neighboring countries to become known as Asian currency crisis.
As interest rates fall and the economy strengthens, demand for commodities increases and commodity prices rise. Keep in mind that an "inflationary environment" does not mean runaway inflation. It simply means that the inflationary forces are stronger than the deflationary forces.
In an inflationary environment, stocks react positively to falling interest rates (rising bond prices). Low interest rates stimulate economic activity and boost corporate profits.
This means they both move in the same direction. The world was in an inflationary environment from the 1970's to the late 1990's. These are the key intermarket relationships in a inflationary environment:
A POSITIVE relationship between bonds and stocks
An INVERSE relationship between interest rates and stocks
Bonds usually change direction ahead of stocks
An INVERSE relationship between commodities and bonds
A POSITIVE relationship between commodities and interest rates
A POSITIVE relationship between stocks and commodities
Commodities usually change direction after stocks
An INVERSE relationship between the US Dollar and commodities
Inflationary Relationships
The intermarket relationships depend on the forces of inflation or deflation. In a "normal" inflationary environment, stocks and bonds are positively correlated.
There are clear relationships between stocks and bonds, bonds and commodities, and commodities and the Dollar. Knowing these relationships can help chartists determine the stage of the investing cycle, select the best sectors and avoid the worst performing sectors. Much of the material for this article comes from John Murphy's book and his postings in the Market Message at Stockcharts.com.
In his classic book on Intermarket Analysis, John Murphy notes that chartists can use these relationships to identify the stage of the business cycle and improve their forecasting abilities.
Intermarket analysis is a branch of technical analysis that examines the correlations between four major asset classes: stocks, bonds, commodities and currencies.
Heya Pete! $PMCB On the Move again, coming off that last pullback i see?
Keep an eye on $IMTL at these levels, kinda oversold don't u think?
HAPPY SAINT PADDY'S DAY!!!!!
Pretty amazing what it does for epilepsy and parkinson's patients.
You have a great weekend bud!
Good Morning! $KOSK news i see. Was she green at the open off that news?
More people also wanted control over their retirement funds. Those with Defined-Benefit Plans must make their own investment choices and this increases the exposure to stocks.
8. Defined-Contribution Pension Plans grew and replaced many Defined-Benefit Plans. Among other things, the decline in unions and big manufacturing industries (autos) contributed to this trend.
Analysts were hesitant to issue sell recommendations because many firms also had investment banking ties with the company. Analysts also did not want to offend the company because they might then be cut off from earnings guidance or key information.
7. Analysts estimates were routinely overoptimistic in the last 1990's. Shiller notes that Zachs reported sell recommendations on 9.1% of stocks in 1989 and just 1% of stocks in late 1999.
Good stories replaced hard news. Increased media exposure led to more advertising and this simply fed the public appetite for stocks. The media continues to pour it one with Mad Money debuting in 2005
6. The 1990's surge in business media undoubtedly contributed to interest in the stock market. Not much explanation is needed here. Newspapers created big glossy business sections to attract readers.
However, Shiller argues with data that there is no correlation between a baby boom and a surging stock market. Instead, Shiller argues that, as with the Internet, the public perceptions of the baby boom influence help inflate the stock market.
In addition to letting the bubble grow, the Fed indicated that it would be there to pick up the pieces should anything go wrong, just like in 1987 and 1998. Having the Fed on standby in the event of a market crash was like owning a put option.
4. Monetary policy and the Greenspan put took perceived risk out of the equation. The Fed did nothing to stop the surging stock market from 1995 to 1999. Interest rates did not increase until August 1999.
The Internet came of age in the mid 1990's and grew rapidly the next five years. Investors viewed this Internet revolution as a game changer that justified the stock market boom.