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23 INTERMARKET ANALYSIS JOHN MURPHY ON TODAY'S CHANGING MARKETS By Kira Brecht Years ago when I trained to be a technical analyst at an institutional advisory firm, my boss handed me John Murphy's Technical Analysis of the Financial Markets and told me to read it. A few days later, I told him I was done. He gave the book back to me and said "No, you really need to learn this material." That was just the beginning. To many technical traders Murphy's original book was considered the "bible" of technical analysis. I still have that book on my desk today for reference. Murphy's knowledge and understanding of the charts and the intuitive ability to make intermarket connections is legendary. Murphy is one of the INTERMARKET RELATIONSHIPS The dollar and commodities trend in opposite directions. Bond prices and commodities trend in opposite directions. Since 1998, bond and stock prices have trended inversely. Since 2008, stocks and commodities have been closely correlated. —From Trading With Intermarket Analysis by John J. Murphy, published by John Wiley & Sons, Inc. 2013
24 Bond/Stock Connection most renowned technical analysts of our time, and author of a number of significant books. He has over forty years experience and his work is currently seen at Stockcharts.com. I was fortunate to speak with Murphy late last year about his new book Trading with Intermarket Analysis, in which he updates market correlations, highlights key tips for interpreting intermarket connections and outlines "the new normal" for intermarket relationships since his last book. It is a great read. Trading ETFs In his new book, Murphy relies on a bevy of exchange traded funds (ETFs) to demonstrate trading opportunities on intermarket correlations. Murphy explained his choice as ETF as the key vehicle: "Ten years ago, if you wanted to trade commodities or currencies, you had to trade futures. Also, in the old days, you had to use mutual funds if you wanted to trade sectors. The beauty of ETFs is that they let you trade any part of the stock market that you want—large cap, small cap, for example. You can move in and out of the market; and if you are a chartist you can chart volume data. They trade just like a stock. Also, there are ETFs for every region of the world. By following 50 ETFs you can track everything in the world. ETFs have revolutionized the ability to take advantage of intermarket relationships," Murphy told TraderPlanet in an exclusive interview. Taking a look at market action in late December 2012, US stocks—as measured by the S&P 500 (SPX) — remain in a bull market. However, a monthly chart shows equities locked in a decade long sideways range. Meanwhile, US Treasuries have also been in one of the most historic and long-lasting bull moves ever seen. However, the US Fed, with its unprecedented monetary policy accommodation has been the fuel behind the massive bull market in bonds, some say inflating prices artificially, in an attempt to stimulate sluggish economic conditions with a low interest environment. Murphy points to the Federal Reserve's actions since 2008, which include keeping the main policy rate at near zero and massive quantitative easing, and told TraderPlanet: "I am nervous. There is very little precedent about what the Fed and central banks around the world are doing. It's very unconventional. There are a lot of academics playing around with the system and I don’t know if they fully understand how markets work. These guys know very little about the markets in my view. I just think they are playing with fire." "Seventy percent of all bonds bought this year  were bought by the Fed. That has distorted relationships and I think it is a very dangerous strategy. They are interfering with the normal relationship between stocks and bonds. Even senior citizens are being forced to leave fixed income [in search of higher yield]. They are forcing people to take on risk. What the Fed is saying is that 'we don't have any confidence in this economy and that's why we are keeping rates so low.' But, at the same time they are trying to push people into more risky assets that aren't justified by the fundamentals," Murphy warned. Continued on Next Page