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Intermarket Analysis: Profiting from Global Market Relationships

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Praise for INTERMARKET ANALYSIS

"John Murphy has done it again. He dissects the global relationships between equities, bonds, currencies, and commodities like no one else can, and lays out an irrefutable case for intermarket analysis in plain English. This book is a must-read for all serious traders."

-Louis B. Mendelsohn, creator of VantagePoint Intermarket Analysis software

"John Murphy's Intermarket Analysis should be on the desk of every trader and investor if they want to be positioned in the right markets at the right time."

-Thom Hartle, President, Market Analytics, Inc. (www.thomhartle.com)

"This book is full of valuable information. As a daily practitioner of intermarket analysis, I thought I knew most aspects of this invaluable subject, but this book gave me several new ideas. I thoroughly recommend it for beginners and professionals."

-Martin Pring, President of Pring.com and editor of the Intermarket Review Newsletter

"Mr. Murphy's Intermarket Analysis is truly the most efficient and unambiguous way to define economic and fundamental relationships as they unfold in the market. It cuts through all of the conflicting economic news/views expressed each day to provide a clear picture of the 'here and now' in the global marketplace."

-Dennis Hynes, Managing Director, R. W. Pressprich

"Master Murphy is back with the quintessential look at intermarket analysis. The complex relationships among financial instruments have never been more important, and this book brings it all into focus. This is an essential read for all investors."

-Andrew Bekoff, Technical Strategist, VDM NYSE Specialists

"John Murphy is a legend in technical analysis, and a master at explaining precisely how the major markets impact each other. This updated version provides even more lessons from the past, plus fresh insights on current market trends."

-Price Headley, BigTrends.com, author of Big Trends in Trading

Table of Contents

  1. Title Page
  2. Copyright
  3. Dedication
  4. Acknowledgments
  5. Introduction
    1. EARLIER BOOK COVERED THE 1980s
    2. JAPANESE BUBBLE BURSTS IN 1990
    3. THIRD ANNIVERSARY OF 2000 MARKET TOP
    4. THE DEFLATION SCENARIO
    5. INTERMARKET MODEL FROM 1980 TO 1997
    6. THEN CAME 1998 AND THINGS CHANGED
    7. THE ROLE OF OIL
    8. THE RESURGENCE OF GOLD
    9. ASSET ALLOCATION AND ECONOMIC FORECASTING
    10. IMPORTANCE OF CHARTS
  6. CHAPTER 1 - A Review of the 1980s
    1. COMMODITIES PEAK IN 1980
    2. DOLLAR BOTTOMS IN 1980
    3. BONDS BOTTOM IN 1981
    4. STOCKS BOTTOM IN 1982
    5. HOW THE FOUR MARKET GROUPS INTERRELATE
    6. 1987 STOCK MARKET CRASH REVISITED
    7. COMMODITIES RISE, BONDS FALL DURING SPRING OF 1987
    8. STOCK MARKET PEAKS IN AUGUST
    9. DOLLAR FALLS WITH STOCKS
    10. THE 1987 MARKET CRASH WAS GLOBAL
    11. LATER EXAMPLES OF GLOBAL LINKAGES
    12. THE DOLLAR’S IMPACT CAN BE DELAYED
    13. ONWARD AND UPWARD TO 1990
  7. CHAPTER 2 - 1990 and the First Persian Gulf War
    1. BONDS TURN DOWN IN EARLY 1990
    2. CRB TURNS UP IN EARLY 1990
    3. BONDS AND STOCKS DIVERGE
    4. GLOBAL MARKETS DON’T CONFIRM U.S. RALLY
    5. IRAQ INVADES KUWAIT IN AUGUST
    6. OIL AND GOLD SOAR
    7. EVERYTHING REVERSES AT THE START OF WAR
    8. 1990 DIVERGENCE BETWEEN OIL AND OIL SHARES
    9. THE IMPORTANCE OF $40 OIL
    10. INTERMARKET LESSONS LEARNED DURING 1990
    11. COMPARISONS BETWEEN 2003 AND 1991
    12. JAPAN NEVER RECOVERS
  8. CHAPTER 3 - The Stealth Bear Market of 1994
    1. THINGS LOOK GOOD FROM 1990 THROUGH 1993
    2. A DESCRIPTION OF THE CRB INDEX
    3. THE CRB INDEX TURNS UP IN EARLY 1993
    4. WATCH INDUSTRIAL PRICES
    5. THE JOURNAL OF COMMERCE (JOC-ECRI) INDEX
    6. GOLD AND OIL ARE ALSO IMPORTANT
    7. GOLDMAN SACHS COMMODITY INDEX
    8. BONDS PEAK AHEAD OF STOCKS
    9. THE STEALTH BEAR MARKET
    10. A LOSS FOR UTILITIES IS A GAIN FOR METALS IN 1994
    11. INTERMARKET PICTURE REVERSES IN 1995
    12. THE CRB/BOND RATIO
    13. BONDS AND STOCKS RISE TOGETHER UNTIL 1998
  9. CHAPTER 4 - The 1997 Asian Currency Crisis and Deflation
    1. ASIAN CURRENCY CRISIS STARTS IN 1997
    2. BONDS AND STOCKS START TO DECOUPLE
    3. THE DEFLATION SCENARIO
    4. 1997 AND 1998 WERE ONLY A DRESS REHEARSAL
    5. INTERMARKET PICTURE DURING 1997 AND 1998
    6. THE DOLLAR VERSUS COMMODITIES
    7. HONG KONG AND INDUSTRIAL METALS PEAK TOGETHER
    8. COMMODITIES VERSUS BONDS
    9. BONDS VERSUS STOCKS
    10. BONDS AND STOCKS DIVERGE IN 1998
    11. THE CRB/BOND RATIO AND SECTOR ROTATION
    12. CONSUMER VERSUS CYCLICAL STOCKS
    13. CRB/BOND RATIO COLLAPSES DURING 1997
    14. RELATIVE STRENGTH ANALYSIS
    15. PLOTTING A RATIO OF TWO COMPETING SECTORS
    16. INTERMARKET LESSONS OF 1997 AND 1998
  10. CHAPTER 5 - 1999 Intermarket Trends Leading to Market Top
    1. 1999 SEES REVERSAL OF 1998 TRENDS
    2. COMMODITIES JUMP AT START OF 1999
    3. COMMODITIES AND RATES TREND TOGETHER
    4. INDUSTRIAL COMMODITIES AND OIL BOTTOM
    5. THE IMPACT OF RISING RATES ON STOCKS
    6. NYSE ADVANCE-DECLINE LINE FALLS IN 1999
    7. INTERMARKET SECTOR EFFECT
    8. RISING CRUDE WAS GOOD FOR OIL SHARES
    9. TRANSPORTATION STOCKS FALL HARD
    10. FINANCIAL STOCKS LOSE FAVOR DURING 1999
    11. OTHER SECTOR INFLUENCES
    12. SECTOR ROTATION AND THE ECONOMY
    13. GLOBAL INFLUENCES IN 1999
    14. HONG KONG AND SEMICONDUCTORS
    15. THE AUSTRALIAN DOLLAR AND COMMODITY PRICES
  11. CHAPTER 6 - Review of Intermarket Principles
    1. INTRODUCTION
    2. AN EVOLUTIONARY STEP IN TECHNICAL ANALYSIS
    3. EMPHASIS ON SECTOR WORK
    4. ASSET ALLOCATION STRATEGIES
    5. THE BASIC PREMISE OF INTERMARKET ANALYSIS
    6. GLOBAL MARKETS
    7. GLOBAL SECTOR TRENDS
    8. JAPAN’S EFFECT ON U.S. MARKETS
    9. JAPAN EFFECT OVERRIDES THE FED
    10. ECONOMIC LESSONS
    11. THE TECHNICAL NATURE OF INTERMARKET ANALYSIS
    12. ADVANTAGES OF CHARTING—THE BIG VIEW
    13. ECONOMIC FORECASTING
    14. MARKETS ANTICIPATE ECONOMIC TRENDS
    15. THE ROLE OF THE DOLLAR
    16. GLOBAL IMPACT OF CURRENCY TRENDS
    17. DOLLAR IMPACT ON MULTINATIONALS
    18. MCDONALDS AND PROCTER & GAMBLE PROFIT FROM WEAK DOLLAR
    19. DOLLAR IMPACT ON DRUG STOCKS
    20. SMALL STOCKS ARE DOMESTIC
    21. WEAK DOLLAR ALSO HELPS SERVICE STOCKS
    22. RECAP OF INTERMARKET PRINCIPLES
  12. CHAPTER 7 - The Nasdaq Bubble Bursts in 2000
    1. AN HISTORIC YEAR
    2. INVERTED YIELD CURVE IMPLIES ECONOMIC WEAKNESS
    3. THE WARNING SIGNS WERE THERE ON THE CHARTS
    4. SEEING THINGS AS THEY HAPPEN
    5. JANUARY 30, 2000: YIELD CURVE INVERSION
    6. 1969 ALL OVER AGAIN?
    7. JANUARY LOWS BROKEN
    8. CASH IS GOOD
    9. APRIL 15, 2000: NASDAQ BREAKS MOVING AVERAGE LINE-NYSE FAILURE
    10. REITS HOLD UP
    11. REITS SHOW GOOD RELATIVE STRENGTH
    12. REIT INDEX TURNS UP
    13. APRIL 21, 2000: MARKET’S ECONOMIC MESSAGE—ECONOMIC SLOWING
    14. COPPER AND LONG RATES PEAK TOGETHER AT START OF 2000
    15. ECONOMIC WEAKNESS FAVORS CONSUMER STAPLES
    16. CONSUMER STAPLES START TO OUTPERFORM
    17. THINGS COULD NOT BE BETTER
    18. AUGUST 11, 2000: SHIFT TO VALUE
    19. SECTOR ROTATION WITHIN THE ECONOMIC CYCLE
    20. WHY IT IS BAD WHEN ENERGY AND CONSUMER STAPLES ARE STRONG
    21. NOVEMBER 10, 2000: IT’S THE ECONOMY
    22. TWOFOLD USE OF SECTOR ROTATION DIAGRAM
    23. THE LESSONS OF 2000
  13. CHAPTER 8 - Intermarket Picture in Spring 2003
    1. FLIGHT TO GOLD
    2. BONDS AND COMMODITIES TREND IN OPPOSITE DIRECTIONS
    3. SEPTEMBER 11 REVERSALS
    4. COMMODITIES FOLLOW THE LEAD OF STOCKS
    5. STOCKS LEAD COMMODITIES HIGHER
    6. BOND AND STOCK PRICES TREND IN OPPOSITE DIRECTIONS
    7. SEPTEMBER 11 REVERSES TRENDS
    8. FALLING STOCKS ARE GOOD FOR GOLD
    9. MAY 22, 2002: MAJOR DOLLAR TOP IN THE MAKING
    10. FALLING DOLLAR IS BULLISH FOR GOLD
    11. GOLD STOCKS SHINE
    12. ONE YEAR LATER: THE FED DISCOVERS DEFLATION
    13. LETTING THE DOLLAR FALL
  14. CHAPTER 9 - Falling Dollar During 2002 Boosts Commodities
    1. COMMODITIES INFLATE
    2. DOLLAR PEAK COINCIDES WITH COMMODITY BOTTOM
    3. BONDS AND COMMODITIES DECOUPLE
    4. WAR PREMIUM PUSHES OIL HIGHER
    5. COMMODITY DIVERGENCE: WEATHER VERSUS THE ECONOMY
    6. INDUSTRIAL METALS AND INTEREST RATES TREND TOGETHER
    7. COMMODITY PRICES AND BOND YIELDS NORMALLY TREND TOGETHER
    8. ASIAN DEFLATION PULLS U.S. RATES LOWER
    9. GLOBAL BEAR
    10. JAPAN PULLING WORLD MARKETS LOWER
    11. DEFLATION SCENARIO: U.S. STOCKS AND RATES FALL TOGETHER
    12. COMMODITIES GAIN FROM BATTLE AGAINST DEFLATION
    13. DOLLAR TOP LEADS TO NEW BULL MARKET IN GOLD
    14. SWING BACK TO HARD ASSETS?
  15. CHAPTER 10 - Shifting from Paper to Hard Assets
    1. GOLD COMES BACK INTO FAVOR
    2. GOLD BREAKS 15-YEAR RESISTANCE LINE
    3. GOLD TURNS UP AS STOCKS TURN DOWN
    4. COMMODITIES OUTPERFORM STOCKS FOR FIRST TIME IN 20 YEARS
    5. WHY 2003 WAS NOT A REPLAY OF 1991
    6. CYCLICAL TRENDS VERSUS SECULAR
    7. HISTORICAL RESEARCH ON CYCLICAL BULLS
    8. SECULAR BEAR IN STOCKS IS GOOD FOR GOLD
    9. RISING CURRENCY MARKETS
    10. THE FALLING DOLLAR HURTS GLOBAL MARKETS
    11. CHINA NOT AFFECTED BY DOLLAR MOVES
    12. COMMODITY CURRENCIES RALLY
    13. USING THE FUTURES MARKETS
    14. NOT A LOT OF ALTERNATIVES IN TRADITIONAL MARKETS
    15. BUYING COMMODITY-RELATED STOCKS
  16. CHAPTER 11 - Futures Markets and Asset Allocation
    1. RELATIVE STRENGTH ANALYSIS AMONG ASSET CLASSES
    2. BONDS VERSUS STOCKS
    3. COMMODITIES VERSUS BONDS
    4. THE DOW/GOLD RATIO
    5. INCLUDING COMMODITIES AND CURRENCIES
    6. CAN FUTURES PLAY A ROLE IN ASSET ALLOCATION?
    7. BUILT-IN ASSET ALLOCATION MODEL
    8. CHARTS COMPARING FUTURES MARKETS—GOING LONG OR SHORT
    9. USING MANAGED FUTURES ACCOUNTS
    10. FUTURES PORTFOLIOS CORRELATE POORLY WITH BONDS AND STOCKS
    11. COMMODITY FUTURES AS AN ASSET CLASS
    12. PUSHING THE EFFICIENT FRONTIER
    13. TREATING CURRENCIES AS AN ASSET CLASS
    14. THE IMPACT OF A FALLING DOLLAR
    15. GOLD MEASURED IN FOREIGN CURRENCIES
    16. GOLD/CURRENCY RATIOS ARE RISING
    17. GOLD IS STRONGER THAN ALL MAJOR CURRENCIES
    18. SUMMARY
  17. CHAPTER 12 - Intermarket Analysis and the Business Cycle
    1. THE FOUR-YEAR BUSINESS CYCLE
    2. THE BUSINESS CYCLE EXPLAINS INTERMARKET ROTATION
    3. THE CHRONOLOGICAL SEQUENCE OF BONDS, STOCKS, AND COMMODITIES
    4. BONDS ARE THE FOCAL POINT
    5. THE SIX STAGES OF THE BUSINESS CYCLE
    6. LESSONS OF 2000
    7. BONDS AS A LEADING ECONOMIC INDICATOR
    8. STOCKS AND COMMODITIES AS LEADING INDICATORS
    9. MORE ON THE JOC INDEX
    10. PREDICTING THE 2001 RECESSION
    11. THE THREE MARKETS FOLLOWED THE PROPER ROTATION FOR TOPS
    12. MARKET ROTATIONS DURING THE 1920s AND 1930s
    13. COMMODITIES PEAKED IN 1920
    14. BONDS BOTTOM DURING 1920
    15. STOCKS BOTTOM DURING 1921
    16. BONDS TURN DOWN IN 1928
    17. BONDS AND STOCKS DECOUPLE IN 1929—COMMODITIES PLUNGE
    18. STOCKS AND COMMODITIES BOTTOM TOGETHER IN EARLY 1930S
    19. REFLATING DURING THE 1930s
    20. BOND YIELDS SPIKE UP TEMPORARILY IN 1931
    21. STOCKS AND COMMODITIES COMPLETE BOTTOMS IN EARLY 1940s
    22. ROTATING ASSET CLASSES OVER DECADES
    23. LESSONS OF LONG CYCLES
    24. THE KONDRATIEFF WAVE
    25. DIVIDING A LIFETIME CYCLE INTO FOUR SEASONS
  18. CHAPTER 13 - The Impact of the Business Cycle on Market Sectors
    1. SECTOR ROTATION WITHIN THE BUSINESS CYCLE
    2. SECTOR ROTATION IN 2000 FAVORED CONTRACTION
    3. ANOTHER VIEW OF THE ECONOMIC CYCLE
    4. SECTOR ROTATIONS DURING 2003 SUGGEST EARLY EXPANSION
    5. SECTOR LEADERSHIP MOVES TO CONSUMERS AND TECHNOLOGY
    6. RELATIVE STRENGTH OF CONSUMER SPENDING
    7. RETAIL BUYING
    8. TECHNOLOGY LEADERSHIP IS A GOOD SIGN
    9. NASDAQ LEADS MARKET HIGHER DURING 2003
    10. TRANSPORTATION LEADERSHIP
    11. CYCLICALS STARTING TO OUTPERFORM STAPLES
    12. SMALLER STOCKS LEAD AT BOTTOMS
    13. SECTOR ROTATION MODEL
    14. SECTOR ROTATION MODEL SUPPORTING DATA
    15. INTEREST RATE TRENDS
    16. THE YIELD CURVE
    17. YIELD CURVE FLATTENS DURING 2003
    18. ANOTHER VIEW OF THE YIELD CURVE
  19. CHAPTER 14 - Diversifying with Real Estate
    1. LOCATION IS EVERYTHING
    2. THIS CYCLE HAS BEEN DIFFERENT
    3. REITS TURN UP AS NASDAQ PEAKS
    4. ROLE REVERSALS IN 2000
    5. THINGS START TO CHANGE DURING THE SUMMER OF 2002
    6. REITS PEAK IN 2002 AS MARKET BOTTOMS
    7. REITS UNDERPERFORM AFTER SUMMER OF 2002
    8. HOUSING IS INTEREST RATE-SENSITIVE
    9. REAL ESTATE DOES NOT ALWAYS FOLLOW INFLATION
    10. REAL ESTATE DOES NOT ALWAYS FOLLOW INTEREST RATES
    11. REAL ESTATE DOES NOT ALWAYS FOLLOW STOCKS
    12. THE LONG CYCLE IN REAL ESTATE ACTIVITY
    13. COMPARISON TO OTHER CYCLES
    14. SIMILARITIES AND DIFFERENCES: PRESENT DAY AND THE 1930s
    15. HISTORY OF REAL ESTATE CYCLE SINCE 1940
    16. ARE HOMEBUILDING STOCKS LINKED TO STOCKS OR RATES?
    17. HOMEBUILDERS DECOUPLE FROM MARKET DURING 1999
    18. HOUSING STOCKS LINK TO INTEREST RATES
    19. MARKET ROTATION DURING 2000
    20. HOMEBUILDERS AND STOCKS RE-LINK
    21. FED’S DEFLATION FIGHT BOOSTS HOUSING STOCKS
    22. THE HOUSING TRADEOFF
    23. JAPANESE REAL ESTATE COLLAPSED TWO YEARS AFTER STOCKS
  20. CHAPTER 15 - Thinking Globally
    1. ALL MARKETS ARE RELATED
    2. GLOBAL TRADE INCREASES IMPACT OF EXCHANGE RATES
    3. EMERGING MARKETS
    4. MORE INTERMARKET EMPHASIS ON SECTOR WORK
    5. THE INTERMARKET MODEL IS NOT STATIC
    6. BONDS AND STOCKS DECOUPLE
    7. WHY WE NEED TO STUDY HISTORY
    8. THE DECADE AFTER MARKET BOOMS ARE NOT VERY GOOD
    9. INTERMARKET IMPLICATIONS FOR TECHNICAL ANALYSIS
    10. THE NEED FOR BETTER PERIPHERAL VISION
    11. INTERMARKET WORK IS AN EVOLUTIONARY STEP
    12. THERE IS STILL A LOT TO LEARN
  21. Appendix
  22. Index