Intermarket Technical Analysis

by John J. Murphy

Overview

Published in 1991 by John Wiley & Sons, Intermarket Technical Analysis is John Murphy's pioneering exploration of the linkages between the four principal financial market sectors: currencies, commodities, bonds, and stocks. Murphy argues that traditional technical analysis, which focuses on individual markets in isolation, is incomplete without understanding how these sectors influence one another. The book laid the groundwork for what has become an essential dimension of modern market analysis.

Core Thesis

Murphy's central argument is that all financial markets are interconnected. A rising U.S. dollar tends to depress commodity prices; falling commodity prices support bond prices (lower inflation expectations); rising bond prices tend to support stock prices. These cascading relationships create a "ripple effect" that flows through the global financial system. By monitoring these intermarket linkages, traders gain critical context that helps them interpret individual market movements more accurately.

Key Relationships Explored

The book systematically examines the following intermarket linkages:

1. Commodities and Bonds: An inverse relationship exists between commodity prices (as measured by the CRB Futures Price Index) and bond prices. Rising commodities signal inflationary pressure, which drives bond prices lower (yields higher). The 1987 crash was preceded by a bond market collapse driven by surging commodities.

2. Bonds and Stocks: Bond prices tend to lead stock prices. A falling bond market is bearish for equities, as rising interest rates increase the discount rate applied to future earnings and make fixed-income alternatives more attractive.

3. The U.S. Dollar and Commodities: The dollar and commodity prices typically move in opposite directions. A strong dollar suppresses commodity prices by making them more expensive in other currencies, while a weak dollar boosts commodity inflation.

4. International Markets: Murphy demonstrates that global stock and bond markets are increasingly correlated. The British stock market frequently leads U.S. equities at turning points, and the Japanese market in the late 1980s provided critical signals for global direction. Global bond yield trends converge over time.

5. Commodity Indexes: The CRB Index, the Economist Commodity Price Index, and the Journal of Commerce Index are examined for their utility in measuring inflationary pressure. Gold and oil receive special attention as leading indicators of inflation.

The 1987 Crash as Case Study

Murphy devotes extensive analysis to the 1987 crash, showing it was not an isolated event but the predictable consequence of intermarket forces: commodities surged in early 1987, bond prices collapsed, and the resulting bearish divergence between bonds and stocks foreshadowed the October crash. The global nature of the crash -- every major equity market fell -- underscored the importance of international intermarket awareness.

Practical Applications

The book covers relative-strength analysis for ranking commodities and sectors, the use of the Dow Utilities as a leading stock market indicator (due to its interest-rate sensitivity), asset allocation strategies informed by intermarket signals, and the relationship between intermarket analysis and the business cycle. Murphy presents a framework in which monetary easing (falling commodity prices, falling rates) precedes stock market recoveries, while tightening (rising commodities, rising rates) precedes stock market peaks.

Program Trading and Market Myths

Murphy argues that program trading was unfairly blamed for the 1987 crash. From an intermarket perspective, program trading was merely the transmission mechanism for forces already set in motion by the bond-commodity-dollar interplay. The chapter on program trading debunks the idea that computerized trading was the root cause of market dislocations.

Legacy

Intermarket Technical Analysis is widely considered the definitive introduction to cross-market analysis. Murphy's framework has influenced a generation of institutional and retail traders who now routinely monitor bonds, commodities, and currencies as part of their equity analysis. The principles remain applicable across market regimes, though Murphy himself later updated them in Intermarket Analysis (2004) to address post-2000 changes in intermarket relationships, including the shift from deflationary to reflationary environments.