A Quick Lesson on Inter-Market Analysis: Part Two 

Tom Gentile

Posted in Education

By: Tom Gentile on September 27th, 2022 • 5 mins read

A Quick Lesson on Inter-Market Analysis Part Two

The key thing I wanted to educate everyone on yesterday in my Part One lesson is I am trying to assess a directional bias for the financial markets overall.  I then try to drill down as to what sector or corner of the market is seeing a bullish and a bearish bias.

If I can get a sense of which corner of the market is going in which direction I can then further drill down to a stock or stocks in those sectors/corners of the market to place an option trade on.

Bullish or Bearish Trend? It Matters Not

When you hear an informercial or marketing talking about learning how to trade options, they will almost certainly use the phrase, ‘No matter if the market is going up, down, or sideways’.

What they are trying to convey is with options one can learn to trade in a fashion that can earn money with an option if the security (stock or ETF, for example) is going higher in price.

The simple option strategy in that case is to Go Long a Call Option, (aka Buy to Open a Call).

The simple option strategy to use if one believes the stock is going down in price is to Go Long a Put Option, (aka Go Long a Put).

Having both bullish and bearish option strategies one can assess which way they believe a security will trade and use the leverage of options to try and capitalize on that move.

All one has to do is determine in their mind where they believe the security will move and trade accordingly.

This is where Inter-Market Analysis Comes In

Let me once again offer up to everyone what sectors, or as I call them corners of the market, I analyze and the security and ticker symbol I analyze to make a directional assessment on.

They 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)

Let me remind you all these correlations do not happen 100% of the time.

Much of the times you will see US equities (SPY) and US Bonds (TLT) trade inverse to each other

As well you may see US equities (SPY) and Gold (GLD) trade inverse to each other.

One more inverse correlation you may often see is US Equities (SPY) and the US Dollar (UUP) trade inverse to each other.

Basically SPY and USO trade more similarly to each others and they often trade inverse to the others.

A Quick Observation on Correlations of Different Industries

One other thing to note before I show you what is currently going on in the Stock Market regarding the sector correlations is you can look at Inter-Market Analysis by industry and the different seasons within a year where some sectors outperform the markets and 

Take for instance Energy and Oil.  I have written for a number of years a special report on the Opportunities in Energy and Oil.  It is a report that educates people that during the months of mid-February to mid-July energy and oil stocks really pop.  They, for reasons I write about in the report. Have a strong history of trading higher in price over that time period.

It doesn’t mean they won’t trade higher other parts of the year, but that 6-month period of time is typically a robust one for that space, (energy and oil).

The inter-market analysis could be while the energy and oil industry see their share price increase because of the demand in their products, other industries may not do as well because they have to pay the higher prices of this product and that cuts into their margins and potentially their earnings.

What industries may not fare as well due to higher prices of oil?  How about airlines? Trucking?  Shipping?

You see where things are good in one sector it may come at the expense of another and getting your inter-market analysis  down to where you can spot patterns of where one sector prospers more often over a period of time and where others may not do so good over that same period of time can help you establish your directional bias on each and trade your potions accordingly.

Current Sector Correlation in Today’s Stock Market

I will end this education with a current look at the current correlation between the corners of the market I analyze and show you that in this year’s, 2022, market there is one ‘corner’ that is inversely correlated to the other as it is the one that is causing the most pain to all the other corners or sectors and that is the US Dollar, (which I use UUP to represent).

One batch of education that may help understand why is: A strong US dollar might have a negative impact on earnings for companies selling goods and services abroad.

When the US dollar is stronger, the monetary exchange rate gets less favorable and could hurt the value of their international sales/profits when converting the money back into US dollars.

Below is the Year-to-Date candle chart on UUP shown first.  After that is each other corner of the market, Year-to-Date.  This will show you the current correlation is UUP strong and the others not doing well and even flirting with being in a bear market.

Figure 1: Year-to-Date Candle Chart on UUP
Figure 1: Year-to-Date Candle Chart on UUP
Figure 2: Year-to-Date Candle Chart on SPY
Figure 2: Year-to-Date Candle Chart on SPY
Figure 3: Year-to-Date Candle Chart on TLT
Figure 3: Year-to-Date Candle Chart on TLT
Figure 4: Year-to-Date Candle Chart on USO
Figure 4: Year-to-Date Candle Chart on USO
Figure 5: Year-to-Date Candle Chart on GLD
Figure 5: 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.