Sign inIntermarket Comparisons
Traders intuitively realize that what happens in one market influences what happens in another and, conversely, that a development in a related market is likely to have an effect on the market they are trading. If the price of corn increases, it almost certainly will have an affect on the prices of soybeans or wheat; if the price of a major bank stock collapses, it almost surely will affect stocks in the entire financial sector.
Intermarket impacts like this have been occurring for many years, but they have become especially significant in today's global marketplace where the breadth of influence has extended from the local or national scene to the international stage. Developments in Europe or China or elsewhere have a greater effect on U.S. traders than ever before; similarly, U.S. developments may have widespread repercussions overseas.
Although traders have little trouble agreeing that markets influence each other, the difficulty has always been quantifying the degree of these intermarket relationships. With technological advances in communications, the speed and extent of data and news now available means market sentiment about these relationships can change hourly or even from one minute to the next. So intermarket analysis has become an essential component of analyzing today's global markets.
One approach is correlation analysis on two markets to measure the degree to which the prices of one market move in relation to the prices of the second market. This method does have some limitations such as being able to compare only two markets at a time, often assuming - incorrectly - that the effects of one market on another will occur without any leads and lags. Linear correlation analysis also presupposes the effects are linear in nature in a one-to-one causal relationship.
These assumptions are not realistic when it comes to how global financial markets really function with their multiple-market influences being felt over varying periods of time. However, while correlation analysis cannot provide the type of broader intermarket analysis available with VantagePoint Intermarket Analysis Software, correlations can offer some useful information for traders trying to develop a diversified investment portfolio.
Knowing how well markets track - or don't track - each other can be an important step in determining which markets to include in a portfolio or which markets to buy and sell in spread trades. The Securities Intermarket Applications tool makes these comparisons between markets simple and easy to accomplish.
