Question: You mentioned “intermarket analysis” in one of your answers the other day. I am confused about the term. Could you explain it?

John from Tarkington

Answer:

John, to answer your question, let me give you an analogy that will set up my explanation.

Imagine you are a judge in juvenile court, and a thirteen-year-old boy has just come before you for sentencing. As a judge, it is important to look at what has happened, both recently and further in the past. How many crimes has the boy committed? What were the nature of the crimes? What does his overall police record look like? Answering these questions will help you as a judge formulate an opinion about whether this boy might commit future crimes, and thus influence his sentence.

Now, imagine that same judge calling in the parents and asking questions such as: what is the boy’s religious context? Who are his friends, and do the parents know them? What does his school counselor think of the boy? What do his teachers think? Does he have a girlfriend, and what is she like? Answering these questions will help the judge better decide if the boy is headed toward a criminal future.

The first part of this analogy refers to single-market analysis. You are just looking at what a single market has done in the past and you are trying to predict what it will do in the future. The second part of this analogy refers to intermarket analysis. Not only do you want to know what a single market has done in the past, but you also want to know how other markets influence that single market. Knowing the influences upon, as well as the history of the single market, will better help you predict what it might do in the future. In today’s truly global economy, and with the hyper-speed of information transmission, it is more important than ever to understand the influential threads that run through markets. For example, Microsoft sales are not independent from Intel production costs, WalMart profits are connected to the strength of the dollar, and U.S. Treasury notes influence mortgage rates.

To a degree, traders can utilize intermarket analysis on their own, but the true power of intermarket analysis comes with software, specifically software that utilizes sophisticated algorithms and neural networks. My advice to you is find software that utilizes intermarket analysis and add that software to your trading toolbox.

Trade in the day; invest in your life …

Trader Ed