Trading with Intermarket Analysis: A Visual Approach to Beating the Financial Markets Using Exchange-Traded Funds

By John J. Murphy

Quick Summary

John J. Murphy, the pioneer of intermarket analysis, demonstrates how bonds, currencies, commodities, and stocks are interconnected, and how traders can use ETFs to exploit these relationships. The book provides a visual, chart-driven approach to understanding how movements in one market forecast movements in others, covering the dollar-commodity-bond-stock chain, sector rotation, and global macro relationships.

Executive Summary

"Trading with Intermarket Analysis" is a comprehensive update of John Murphy's groundbreaking work on the relationships between different financial markets. Published in 2013, it reflects lessons learned from the 2008 financial crisis and the subsequent recovery. Murphy demonstrates through extensive charting how the four major market sectors -- bonds, currencies, commodities, and stocks -- interact with each other in predictable ways, and how ETFs have made it possible for individual traders to implement intermarket strategies that were once available only to institutions.

Core Thesis

Financial markets do not operate in isolation. The U.S. dollar, commodities, bonds, and stocks form an interconnected chain where movements in one market create predictable effects in the others. A falling dollar typically leads to rising commodity prices, which leads to falling bond prices (rising rates), which eventually pressures stocks. Understanding these intermarket relationships provides traders with a significant analytical edge and enables superior asset allocation decisions. ETFs have democratized access to these markets, allowing individual traders to implement sophisticated intermarket strategies.

Chapter-by-Chapter Analysis

Early Chapters: Intermarket Foundations

Murphy establishes the theoretical framework: the inverse relationship between the dollar and commodities, the negative correlation between commodities and bonds, and the positive correlation between bonds and stocks. He shows how these relationships have played out across multiple market cycles.

Middle Chapters: Sector Rotation and Asset Classes

The book explores how different stock market sectors perform at different stages of the economic cycle, how to use relative strength analysis to identify leading and lagging sectors, and how commodity prices affect inflation expectations and interest rates.

Later Chapters: The Dollar, Stocks, and Global Markets

Murphy examines the complex relationship between the dollar and the stock market, filtered through commodity prices. He shows how global events and cross-border capital flows affect intermarket relationships and demonstrates that the 2008 crisis validated intermarket analysis as commodity and stock markets declined together while bonds rallied.

Final Chapters: Practical ETF Implementation

Detailed guidance on using ETFs to implement intermarket strategies, including sector rotation, commodity exposure, currency trades, and bond market positioning.

Key Concepts and Frameworks

1. The Intermarket Chain -- Dollar, commodities, bonds, and stocks form a linked sequence where each affects the next.
2. Sector Rotation Model -- Different stock sectors lead at different stages of the economic cycle.
3. Relative Strength Analysis -- Comparing performance across markets and sectors to identify leaders and laggards.
4. Deflation/Inflation Regime -- Intermarket relationships shift between inflationary and deflationary environments.
5. ETF Implementation -- Using exchange-traded funds to access all four market sectors.

Practical Applications for Traders

1. Monitor the dollar for early signals about commodity price direction.
2. Watch commodity prices for clues about bond market direction and inflation expectations.
3. Use bond market signals as leading indicators for stock market turning points.
4. Implement sector rotation strategies based on the economic cycle stage.
5. Use ETFs to gain exposure to asset classes showing relative strength.

Critical Assessment

Strengths

• Unmatched expertise in intermarket analysis from the field's pioneer
• Heavily visual with hundreds of annotated charts
• Updated for post-2008 market conditions
• Practical ETF implementation guidance
• Accessible to intermediate traders

Limitations

• Intermarket correlations are not constant and can break down
• Heavy reliance on visual chart analysis without quantitative backtesting
• Some relationships described may shift in different monetary policy regimes
• ETF recommendations may become dated

Key Quotes

• "No market moves in a vacuum."
• "Dollar influence on the stock market needs to be filtered through the commodity markets."
• "The intermarket approach provides a much broader view of the financial landscape than any single-market approach."

Conclusion

"Trading with Intermarket Analysis" is the definitive work on how financial markets interact with each other. Murphy's visual, chart-driven approach makes complex macroeconomic relationships accessible, and the focus on ETF implementation gives traders practical tools. While intermarket correlations can shift over time, the fundamental principle that markets are interconnected remains as valid as ever.