Inter Market Analysis

Inter market analysis is a series of articles studying related segments of the market to identify lead lags between trends in each segment. This can often forewarn you of impending changes in trend and allow for planning of required action based on it. For example midcaps v/s large caps, currencies v/s commodities and US markets v/s European markets and so on. In a global environment inter-market relationships are not restricted to a country but between countries and their respective asset classes as well.

US 10 year T Notes

The US 10 year note has retraced all the recent gains, but should have bottomed. In English bond yields are likely to fall in the US near term. It only means that wave iii did not start. Wave ii is a flat that completed yesterday and again we should attempt a third wave rally above the neckline on bonds. Rising bonds = falling yields. 



When you look at this index you get an idea of the History of Gold mining. The BGMI or Barrons Gold Mining Index shows its bull market from the 19640's to 1982. It was long. The surprise to many would be the sharp decline in the 2010-2014 period given that Gold prices itself did not fall that much. So you were getting gold miners at 2001 prices [not yet they have moved up now]. The real question to ask is will another long term bull market now begin! The prices from 1982 fit a nice channel.


Flasback 2007

We maybe at a point where the US or Developed markets and EM or Developing markets diverge from each other strongly for a while. If not on an absolute basis then on a relative basis. And here is why. A falling dollar is not always good for the US/DM combine as the rising dollar meant rising flows to the US and falling Euro Yen etc was a stimulus to the other economies. Now when the dollar falls however it means stability for the EM/ASia/DevM combine as their debts are no more at currency risk and many are commodity producers and will do well when commodity prices are r, ising.

-Here is a combined chart of 2007-2008 that ads historical perspective. When the US topped in Oct 2007, the high from where the Great Financial crisis followed. Did all world market top there and then. No they did not. The only reason I can think of is that the dollar as shown on this chart was falling till April and stayed down there till June before turning up long term. That period therefore saw India still heading higher till Jan 2008, and Commodity producers like Brazil Russia or Canada continue to all time highs into May 2008 [thanks to rising Oil among others]. Gold prices too rose for most of this period. The point of this chart is to show you that markets can diverge if the reasons arise.

So put that into the current scenario where most commodities are rallying. Another dip in the dollar should convince most that the trend for the dollar has also changed. Then the falling dollar would push up EM/Asia/DevM currencies. But at the same time also continue to push up commodity prices. But it may not be good for the US. Am not sure whether it will be pure hyperinflation or a touch of stagflation at that point. But what it would result is in the divergence in the performance of these markets with the Non Developed market space outperforming, the exact opposite of what we say in 2014-2015. This could continue to the point where interest rates rise far enough to hurt everyone. And if they remain behind the curve then well, it will be a historic divergence between these asset classes.

The arrows on the Dow [DJIA] chart show where other markets made their tops in the months that followed.


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