Across Multiple Markets
Understanding Intermarket Analysis With John J. Murphy
by Matt Blackman
John Murphy has become a household name in the technical analysis community. And how could he not? He was the technical analyst for CNBC for seven years, and is the cofounder and president of MurphyMorris.com. His book Technical Analysis Of The Financial Markets, first written in the late 1980s, has become a classic, and its latest edition is required reading for those studying for the Market Technicians Association's Chartered Market Technicians (CMT) designation. He is also the author of The Visual Investor and Charting Made Easy, and writes the Murphy Market Message, an online newsletter that can be found on StockCharts.com.His latest book on the subject of global market relationships, Intermarket Analysis, has just been published. It updates many of the relationships discussed in his earlier texts, and explains pivotal market changes that have occurred since 1990. STOCKS & COMMODITIES contributor Matt Blackman spoke with John Murphy via telephone on December 2, 2003.
Markets look into the future. By the time fundamental or economic data is available, it is in the past.
When did you first get interested in intermarket analysis?
Early on. When I first started working as a technical analyst in the late 1960s, I was a stock analyst. In the 1970s, I gravitated toward the commodity market and I was in the futures business for the next 15 years while it went through an evolution from hard commodities like grains and corn into financials and currencies. I was there in the mid- to late 1970s, when contracts on currencies and US Treasury bonds were introduced, and in the early 1980s, when they introduced stock index futures.
The stock market people on Wall Street just looked at stocks, and commodity people just looked at commodities. But in the futures world, we were trading commodities, currencies, stocks, and bonds, and we were the only ones doing this. For the first time we had everything in one pile and we were trading it all. I was managing money at the time and witnessed a number of correlations firsthand.
The origins of intermarket analysis!
The real key was when I started working for the Commodity Research Bureau (CRB) as a consultant. When the New York Futures Exchange launched a futures contract on the CRB index in the mid-1980s, I had access to all the research that had been done, and it referred to correlations with stocks and bonds. That solidified my belief in the strong correlation between commodity prices and bonds, and that's how it evolved.
The key factor was the evolution of the futures industry. A futures trader has access to all the markets, and it's only a matter of time before you start seeing the correlations.
That's when you saw the relationship between stocks, bonds, commodities, and later currencies?
After analyzing the CRB index for a long time, the one thing that really got me is when I noticed the strong correlation between bond yields and the CRB. They always tracked together. It made perfect sense. Rising commodity prices are inflationary, and normally, that results in rising interest rates. That's basic economics.
But interest rates affect the stock market, and rising rates are bad
for it. I realized that commodities are a leading indicator for bonds and
stocks. Then later, when I was working in the currency markets, we noticed
that commodities go up when currency goes down.
...Continued in the May 2004 issue of Technical Analysis of STOCKS & COMMODITIES
Excerpted from an article originally published in the May 2004 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2004, Technical Analysis, Inc.