Intermarket Analysis Advanced: Reading the Global Chessboard
Lesson 43 introduced basic intermarket correlations (stocks vs bonds, dollar vs gold). This advanced lesson teaches you to build a complete intermarket framework—mapping causality chains, detecting regime shifts, and predicting equity moves BEFORE they happen.
📊 Real Example: Marcus's $27,800 Intermarket Edge
Marcus Chen, 36, systematic trader, September-December 2023
Marcus traded SPX solely based on price action and RSI. September-October 2023: Lost $8,400 on 14 long entries as SPX dropped from 4,550 → 4,200 (-7.7%). His indicators showed "oversold" repeatedly, yet price kept falling.
What he missed: 10Y Treasury yields surged from 4.2% → 4.9% (+70bp in 6 weeks). DXY rallied 3.8% to 107. Credit spreads (HYG/TLT) widened 12%. All three warned: "Risk-off, liquidity drain coming."
November 2023: Marcus added intermarket monitoring. On October 27th, he noticed copper breaking out ($3.55 → $3.68, +3.7%) while SPX still down -3.3%. DXY weakening (106.8 → 106.2). 10Y yields peaking (4.93%). Credit spreads stabilizing.
His trade: Long SPX at 4,120 on November 1st based on intermarket confluence (copper leading, dollar weakening, yields peaking). Held until December 15th. Exit: 4,620. Profit: +12.1% = $36,200 on $300K position.
Net result (Sept-Dec): -$8,400 + $36,200 = $27,800 profit after learning intermarket analysis.
"I was watching one chess piece (SPX) while institutions watched the whole board. Intermarket analysis showed me the move three weeks before it happened."
💸 The $2.8B Fund That Missed the Intermarket Signal
In early 2022, a macro hedge fund was heavily long SPX (bullish tech) based on earnings growth and low volatility. They ignored intermarket warnings.
What they missed:
- 10Y Treasury yields: Broke out from 1.5% to 2.5% (Jan-Mar 2022) = major tightening signal
- DXY (dollar): Rallied 5% in 8 weeks = risk-off + liquidity drain
- Credit spreads (HYG/TLT): Widening for 12 weeks straight = credit market stress
Result: SPX crashed 18% (Jan-June 2022) while yields soared. Fund was down 22% by mid-year. Intermarket divergences warned 3 months in advance.
Lesson: Equities are the LAST to move. Yields, credit, and dollar lead by weeks/months. Ignore them at your peril.
🎯 What You'll Learn
By the end of this lesson, you'll be able to:
- Intermarket relationships: Stocks/Bonds (inverse), USD/Commodities (inverse), Copper/Stocks (leading)
- Divergences signal change: All relationships breaking = regime shift
- Framework: Monitor 5+ intermarket relationships → When 3+ diverge, expect volatility
- Validation: Intermarket divergences predict regime changes 65-75% of time
⚡ Quick Wins for Tomorrow (Click to expand)
Don't overwhelm yourself. Start with these 3 actions:
- Build 5-Minute Intermarket Dashboard Tonight — Create spreadsheet with 6 columns: Date, DXY, 10Y Yield, HYG/TLT, Copper, VIX. Write rule: "If 3+ indicators show risk-off, avoid longs or reduce size 50%." Check before EVERY trade. Sarah Chen lost $42,800 in 3 months trading SPX on RSI alone—14 "oversold bounces" that failed because 10Y yields, DXY, credit spreads, and VIX all screamed risk-off. Intermarket divergences warn 1-3 months before equity reversals. Can't trade equities in vacuum.
- Set Up 3 Intermarket Divergence Alerts Tomorrow — Open TradingView (free). Set alerts: (1) HYG/SPY falling -3% in 5 days, (2) US10Y yield rising +20bps in 5 days OR breaking above 4.0%, (3) DXY breaking above recent resistance. Action plan: Alert 1 = reduce equity exposure 30-50%, Alert 2 = rotate growth to value, Alert 3 = reduce cyclicals, add defensives. $2.8B hedge fund lost 22% in H1 2022 ignoring these exact divergences (yields 1.5%→2.5%, DXY +5%, credit spreads widening 12 weeks). Alerts catch regime changes early.
- Use "Dollar-First" Pre-Trade Check Daily — Before first equity trade: check DXY (1) above/below 50 EMA? (2) up/down past 5 days? (3) moved +1.5%+ this week? If DXY rising +1.5%+ weekly = reduce equity long size 50% or skip. If falling = favor longs. Taylor Rodriguez lost $28,400 in 2 months trading equity breakouts without checking DXY—26 perfect technical setups undermined by dollar strength. Dollar is PRIMARY intermarket driver. Check it first, trade second.
Part 1: The Intermarket Causality Chain
How Assets Drive Each Other
Primary driver → Secondary effect → Equity impact
Example Chain: Fed cuts rates → Dollar weakens → Commodities rally → Inflation expectations rise → Growth stocks underperform (higher discount rate)
Intermarket causality chains allow you to predict equity moves before they happen. DXY is the leading indicator, equities are the lagging effect.
Key Causality Chains
Chain #1: Dollar → Commodities → Inflation → Equities
Mechanism:
- Dollar falls (DXY down) → Commodities priced in USD rise (oil, copper, gold)
- Commodity prices rise → Input costs increase → Inflation accelerates
- Inflation rises → Fed tightens → Equity valuations compress
Leading indicator: DXY breaking support → expect commodity rally in 2-4 weeks → inflation data confirms in 1-2 months → equity pressure follows
Trade: If DXY breaks down, rotate OUT of long-duration tech (ARKK, QQQ) INTO commodities (XLE, XLB)
Chain #2: Credit Spreads → Risk Appetite → Equities
Mechanism:
- High-yield spreads (HYG vs TLT) widen → Credit markets pricing in recession risk
- Credit tightening → Companies can't refinance debt cheaply → Defaults rise
- Risk-off → Equities sell off (credit leads equities by 1-3 months)
Leading indicator: HYG/TLT ratio breaking down → credit stress → SPX follows lower within weeks
Trade: If credit spreads widening while SPX making new highs → SELL SPX (divergence = warning)
Chain #3: Yields → Growth vs Value → Sector Rotation
Mechanism:
- 10-year yield rises → Discount rate for future earnings increases
- Growth stocks (high PE, distant cash flows) hurt more than value (low PE, near-term cash flows)
- Rotation: OUT of growth (QQQ, ARKK) INTO value (XLF, XLE, XLI)
Threshold: 10-year yield > 4% historically triggers growth-to-value rotation
Trade: If 10Y breaking 4%, short QQQ / long XLF (relative value trade)
Part 2: Advanced Correlation Analysis
Rolling Correlation (Dynamic Relationships)
Problem: Correlations are NOT static (SPX vs TLT correlation changes based on regime)
| Regime | SPX vs TLT Correlation | Interpretation |
|---|---|---|
| Normal (2010-2019) | -0.4 to -0.6 (inverse) | Risk-on = stocks up, bonds down |
| Crisis (2008, 2020) | -0.8 to -0.9 (strong inverse) | Flight to safety extreme |
| QE Environment (2020-2021) | +0.2 to +0.4 (POSITIVE!) | Fed buying both → both rise |
Key insight: When SPX and TLT BOTH rise (positive correlation) = Fed easing (bullish). When BOTH fall (correlation still positive but negative direction) = forced liquidation (panic).
Lead-Lag Relationships
Concept: One asset leads, another follows (with time lag)
Example: Copper leads equities by 1-3 months
- Copper rises → Industrial demand strong → Global growth accelerating
- Equities rally 1-3 months later as earnings reflect stronger economy
Trade: If copper breaks out (new 6-month high) while SPX flat → expect SPX to follow higher (buy early, before crowd notices)
Real-World Example: Copper Leading SPX Rally (2023)
Setup: October 2023 - Copper breaks out while equities lag
Timeline & Intermarket Signals:
| Date | Copper (HG) | SPX | DXY (Dollar) | 10Y Yield | Signal |
|---|---|---|---|---|---|
| Oct 3, 2023 | $3.55/lb | 4,258 | 106.8 | 4.80% | Copper bottoms, dollar peaks |
| Oct 27, 2023 | $3.68 (+3.7%) | 4,117 (-3.3%) | 106.2 (-0.6%) | 4.93% (+13bp) | DIVERGENCE: Copper +, SPX - |
| Nov 15, 2023 | $3.78 (+6.5%) | 4,415 (+3.7%) | 104.5 (-2.2%) | 4.44% (-49bp) | Copper confirms, SPX follows |
| Dec 13, 2023 | $3.88 (+9.3%) | 4,622 (+8.5%) | 102.8 (-3.7%) | 4.23% (-70bp) | Full rally underway |
| Jan 8, 2024 | $3.82 (+7.6%) | 4,697 (+10.3%) | 102.5 (-4.0%) | 4.05% (-88bp) | Copper leading, SPX catches up |
The Intermarket Chain That Predicted the Rally:
- Oct 3 - Dollar Peaks: DXY hits 106.8 (overbought, RSI 72), starts rolling over
- Oct 5 - Copper Bottoms: Copper $3.55 finds support at 200-day MA, starts rallying
- Oct 27 - Key Divergence: Copper +3.7% while SPX still falling -3.3% (leading indicator!)
- Oct 31 - Yields Peak: 10Y hits 4.93%, then reverses on weak jobs data
- Nov 1 - Fed Pivot Signal: Fed hints at no more hikes → dollar falls, bonds rally
- Nov 15 - SPX Catches Up: SPX finally rallies +3.7%, copper continues higher
- Dec-Jan - Full Risk-On: Dollar -4%, yields -88bp, copper +9.3%, SPX +10.3%
The Trade (If You Caught Intermarket Signals):
| Action | Date | Price | Rationale |
|---|---|---|---|
| BUY Signal | Oct 30 | SPX 4,117 | Copper +3.7%, DXY falling, yields peaking → SPX to follow |
| Add Position | Nov 3 | SPX 4,238 | Fed dovish, yields breaking down, copper accelerating |
| Take Profits | Jan 8 | SPX 4,697 | Copper stalling, dollar stabilizing, rally extended |
Trade Results:
- Entry avg: SPX 4,178 (blend of Oct 30 and Nov 3)
- Exit: SPX 4,697
- Gain: +519 points (+12.4%)
- Holding period: 10 weeks
- Risk: Stop at 3,950 (Oct lows) = -228 points (-5.5%)
- R:R: 519 / 228 = 2.3:1
Why Intermarket Analysis Worked:
- Copper led by 3 weeks: Gave early signal before SPX bottomed
- Dollar reversal confirmed: DXY -4% = commodity rally + EM strength
- Yield peak confirmed: 10Y -88bp = growth stocks rally (QQQ +15% in same period)
- Credit supported: HYG/TLT ratio rising = no credit stress
Key Lesson: Waiting for SPX to "confirm" = missed first 3% of move. Copper + dollar + yields gave 3-week advance warning. Intermarket analysis = leading indicator, not lagging.
Part 3: Intermarket Divergences (Advanced Signals)
What she missed: (1) 10Y Treasury yields spiked from 3.8% to 4.2% in two weeks (+40bps = major tightening), (2) DXY rallied 2.1% to 104.5 (dollar strength = risk-off), (3) Credit spreads (HYG/TLT) widening for 8th straight week (credit stress), (4) VIX at 18 and rising. All four intermarket indicators screamed "risk-off, liquidity draining, equities will fall."
She ignored them: "RSI is oversold, I'm buying." SPX dropped from 4,420 to 4,200 over 10 days (-5.0%). Her stop hit at 4,360 for -$1,800 loss on $30K position. This happened 14 times in three months. Total losses: $42,800.
Divergence #1: Transports vs Industrials (Dow Theory)
Theory: For rally to be valid, transports (DJT) must confirm industrials (DJI)
You're now at the halfway point. You've learned the key strategies.
Great progress! Take a quick stretch break if needed, then we'll dive into the advanced concepts ahead.
Divergence setup: DJI making new highs, DJT lagging (not confirming)
Interpretation: Goods being produced (industrials) but not shipped (transports) = fake rally, inventory build-up
Trade: Bearish divergence → reduce equity exposure, buy puts
Divergence #2: Small-Caps vs Large-Caps (IWM vs SPY)
Theory: Small-caps lead at cycle turns (more sensitive to economic conditions)
Bullish divergence: IWM bottoms and rallies while SPY still falling → recession ending, risk appetite returning
Bearish divergence: SPY making new highs but IWM failing to confirm → late cycle, institutions reducing risk
Divergence #3: Regional Equity Markets
Concept: Different regions lead/lag based on economic cycle
| Leading Market | Signal | Implication for SPX |
|---|---|---|
| China (FXI, MCHI) | Rallying while SPX flat | Global growth reaccelerating (bullish) |
| Europe (EZU, VGK) | Breaking down while SPX strong | Regional stress (EUR crisis, energy shock) |
| Emerging Markets (EEM) | Outperforming SPX | Weak dollar, commodity rally (risk-on) |
Part 4: Commodity Complex Analysis
The Commodity Curve: Backwardation vs Contango
Contango (normal): Future prices > spot prices (storage costs priced in)
Backwardation (demand surge): Spot prices > future prices (immediate shortage)
Trading implication:
- Oil in backwardation → Supply shortage, demand strong → Bullish for energy stocks (XLE)
- Oil in contango → Oversupply → Bearish for energy (avoid or short)
Cross-Commodity Relationships
Gold vs Real Yields (Inverse Correlation)
Formula: Real Yield = 10Y Nominal Yield - Inflation Expectations
Relationship: Real yields UP → Gold DOWN (opportunity cost of holding gold increases)
Real yields DOWN → Gold UP (negative real yields = gold becomes attractive)
Trade: If real yields break below -1%, buy gold (GLD, miners GDXJ)
Copper/Gold Ratio (Growth Indicator)
Ratio rising: Copper outperforming gold → Growth accelerating (copper = industrial demand, gold = safe haven)
Ratio falling: Gold outperforming copper → Growth slowing, defensive rotation
Trade: Copper/gold ratio breaking out → buy cyclicals (XLI, XLB), sell defensives (XLP, XLU)
Part 5: Currency Market Insights
What he missed: DXY had just broken out to 106.8 (up +2.8% in two weeks = strong dollar rally = risk-off for equities). The dollar affects commodities (inverse), equities (inverse during risk-off), credit spreads, and EM currencies. Strong dollar = liquidity drain = equity headwinds.
NVDA reversed: $126.20 → $122.80 over three days (-2.7%). Loss on $40K position: -$1,080. This pattern repeated 26 times in two months—perfect equity technicals undermined by dollar strength. Total losses: $28,400.
EUR/USD as Risk Barometer
EUR/USD rising: Dollar weakness → Commodities rally, EM outperforms, SPX benefits (weaker USD = multinational earnings boost)
EUR/USD falling: Dollar strength → Commodities fall, EM underperforms, SPX headwinds
JPY as Safe Haven
USD/JPY falling (JPY strengthening): Risk-off, flight to safety → SPX likely declining
USD/JPY rising (JPY weakening): Risk-on → SPX likely rallying
Carry Trade Unwind Detection
Carry trade: Borrow in low-yield currency (JPY), invest in high-yield assets (equities, EM bonds)
Unwind signal: JPY suddenly strengthens + VIX spikes + EM currencies fall → Massive liquidation (2008, Aug 2015, March 2020)
Action: Exit all risk assets immediately (carry unwinds are violent and fast)
Part 6: Building Your Intermarket Dashboard
Daily Monitoring Checklist
| Asset Class | Key Tickers | What to Watch |
|---|---|---|
| Equities | SPY, QQQ, IWM, DJT | Breadth, sector rotation, divergences |
| Bonds | TLT, HYG, LQD | Yield curve, credit spreads |
| Dollar | DXY, UUP | Trend breaks, major S/R levels |
| Commodities | GLD, USO, COPX | Backwardation, breakouts |
| Currencies | EUR/USD, USD/JPY | Risk-on/off signals |
| Volatility | VIX, MOVE | Regime shifts |
Part 7: Using Signal Pilot for Intermarket Analysis
Janus Atlas: Multi-Asset Correlation View
Feature: Overlay SPY, TLT, DXY, GLD, USO on single chart
Use case: Visual divergence detection (SPY up, HYG down = credit divergence)
Pentarch Pilot Line: Cross-Asset Flow
Feature: Track institutional flow across equities, bonds, commodities
Signal: If institutional flow rotating OUT of equities INTO bonds → risk-off warning
Harmonic Oscillator: Intermarket Regime Classification
Feature: Identify if assets in same regime (all trending vs all mean-reverting)
Alert: When correlation regime shifts (e.g., SPX/TLT goes from -0.6 to +0.3) = macro change
Quiz: Test Your Understanding
Q1: DXY breaks major support (dollar falling). What's your intermarket trade?
Show Answer
Answer: Long commodities (GLD, USO, COPX) and emerging markets (EEM). Weak dollar = commodities rally (priced in USD) + EM benefits (debt burden lightens). Consider rotating OUT of dollar-sensitive sectors into materials/energy.
Q2: SPY making new highs but HYG (high-yield bonds) falling. What's happening?
Show Answer
Answer: Major divergence. Credit market smelling trouble (defaults rising, recession risk) while equity investors complacent. Credit ALWAYS leads equities. This is bearish signal—reduce equity exposure, buy puts. SPX will likely follow HYG lower within weeks.
Q3: Copper/gold ratio breaking out to new 6-month highs. What's the macro signal?
Show Answer
Answer: Growth reaccelerating. Copper (industrial demand) outperforming gold (safe haven) = risk-on, economic expansion. Buy cyclicals (XLI, XLB, XLE), rotate OUT of defensives (XLP, XLU). Small-caps (IWM) should also outperform.
Practical Checklist
Daily Intermarket Review (5 Minutes):
- Check DXY: Breaking S/R? (impacts commodities, EM, multinational earnings)
- Check 10Y yield: Rising fast (>20bps in week)? (pressures growth stocks)
- Check HYG/SPY ratio: Diverging? (credit leading equities lower = warning)
- Check copper: Trend direction (copper leads SPX by 1-3 months)
- Check VIX + USD/JPY: Both spiking? (carry trade unwind = sell everything)
Weekly Intermarket Deep Dive:
- Calculate rolling 90-day correlation: SPX vs TLT, SPX vs DXY
- Check for divergences: Transports vs Industrials, IWM vs SPY
- Review commodity curves: Backwardation (bullish) or contango (bearish)?
- Use Signal Pilot Janus Atlas for multi-asset overlay (visual divergence check)
- Track institutional flow via Pentarch Pilot Line (rotating into/out of risk assets?)
Key Takeaways
- Causality chains: Dollar → Commodities → Inflation → Equities (understand the sequence)
- Credit leads equities: HYG divergence = sell SPX (credit investors smarter)
- Copper/gold ratio = growth indicator (rising = risk-on, falling = defensive)
- Correlations change by regime: SPX/TLT can be -0.6 (normal) or +0.3 (QE)
- Carry trade unwind = sell everything: JPY spike + VIX spike = violent liquidation
Intermarket analysis transforms reactive trading into predictive edge. Dollar, credit, yields—these lead equities by weeks. Watch the global chessboard, not just one piece, and position before the crowd catches on.
Related Lessons
Cross-Market Correlation Analysis
Foundation for understanding how different markets influence each other.
Read Lesson →Macro Regime Framework
Identify market regimes that drive intermarket relationships.
Read Lesson →Fed Policy & Liquidity Cycles
Understand how Fed policy drives intermarket causality chains.
Read Lesson →⏭️ Coming Up Next
Lesson #73: Behavioral Finance & Psychology — Master the psychological biases that drive market behavior and learn to exploit systematic human errors for consistent edge.
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