A Quick Lesson on Inter-Market Analysis: Part One

Tom Gentile

Posted in Education

By: Tom Gentile on September 26th, 2022 • 4 mins read

When one hears the term ‘inter market Analysis’ what does that mean?

Inter market analysis is a method of determining the strength or weakness of one or more asset class(es) or one or moresection of the financial markets relative to other related asset classes or financial markets respectively.

One thing those of you readers or followers of my education have experienced, is I do inter market analysis every week, (we, as options traders fo this more frequently, but I write up my inter market research each week.

I do this in my Tom’s Newsletter.  You can find it each week usually on a Wednesday or a Thrusday.

Log in to my tools www.tomsoptiontools.com.  When you first log in you will see the icon in the first panel labeled Options Trader and it says Tom’s Newsletter with an envelope character next to it.

My primary goal in options trader is to assess a market direction.  Not only or the overall market, which then dictates whether I am overall bullish or bearish, but I then break down other sectors or areas of the financial markets to find strength or weakness, which then dictates how I trade option on stokcs or ETF’s on those aother areas.

Inter-Market Analysis involves Looking at how Certain Markets React in Relation to Each Other

I start out loking at what I call the Corners of the Market.  I look at Equities, Bonds, the US Dollar, Commodities such as Oil and then Gold.

My representative in my writing and what I use for establishing my views on these corners are as follows:

  • Equities – SPY, which is the SPDR S&P 500 ETF Trust (SPY)
  • Bonds – TLT, which is the iShares 20+ Year Treasury Bond ETF (TLT)
  • US Dollar – UUP, which is the Invesco DB US Dollar Index Bullish Fund (UUP)
  • Commoditiy – USO, which is the United States Oil Fund, LP (USO)
  • Commodity – GLD, which is the SPDR Gold Shares (GLD)

I analyze each knowing that some of these corners of the market trade in a correlated or similar fashion and others are non-correlated or they trade inverse to each other.

This sets up where I then go to look for bulilsh option trade opportunities and where I look for bearish option opportunities.

These correlations do not happen 100% of the time.

The typcial tendency is to see equities (stocks) and bonds to trade inverse to each other.  When money is flowing in to one it sometimes comes at the expense of the other.

Think of it as where investors see the better value or return on or of their dollar.

If investors see the prospect of stocks selling off they may move their money to bonds as the longer-term stability and less volatility will keep the returns of their money in a better situation than their current otulook for stocks.

And vice versa.

I often see equities and oil trade more inverse or similar to each other than the relationship of equities to bonds.

Other correlations:  Sometimes when equities are running higher the money going into them comes from the money investors are taking out of Gold or other precious metals.

A Robust US Dollar not a Great Thing for Investors

If the Dollar is moving higher that could adverseley affect the other corners of the market.  In a nutshell, companies that make money overseas see a strong dollar as something that could potentially hurt their earnings.  Weaker foregin currency gets converted in to less US currency and that hurts their earnings.

I will explain that and more in Part Two.

Visual Chart of View of Inter Market Analysis Between Equities and Gold

Figure 1: Year-to-Date Candle Chart on SPY
Figure 1: Year-to-Date Candle Chart on SPY

You can see the inverse correlation that was prevalent almost the entire first quarter fo 2022.  After that both started to trade correlated to each other.  And that correlation has yet to end as they are both trading lower.

Figure 2: Year-to-Date Candle Chart on GLD
Figure 2: Year-to-Date Candle Chart on GLD

App: Toms Option Tools

Market Insight articles may show images of lists of stocks meeting a variety of options parameters like Unusual Call and or Put activity or Expensive IV found on my app Toms Option Tools.

Other times I will have other charts may work to amplify my educational points. 

Those options data lists, however, can be found on my app Tom’s Option Tools. Use your device to search up and download this app and get free access to the Morning Reports section of the app.

Other parts of the app are available at a premium subscription rate, but the Morning Reports Lists are yours free.