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.

⚡ Quick Wins for Tomorrow (Click to expand)

Don't overwhelm yourself. Start with these 3 actions:

1. Build Your 5-Minute Intermarket Dashboard (Prevents 70% of Trades Against Major Macro Trends) — Sarah Chen lost $42,800 in three months by ignoring intermarket signals. She traded SPX purely on price action and RSI, going long every "oversold bounce." August 2023: She bought SPX at 4,420 after RSI hit 28 (oversold). Perfect setup on the daily chart. What she missed: 10Y Treasury yields had just spiked from 3.8% to 4.2% in two weeks (+40bps = major tightening). DXY rallied 2.1% to 104.5 (dollar strength = risk-off). Credit spreads (HYG/TLT ratio) were widening for the 8th straight week (credit stress). VIX was at 18 and rising. All four intermarket indicators screamed "risk-off, liquidity draining, equities will fall." Sarah ignored them because "RSI is oversold." SPX dropped from 4,420 to 4,200 over the next 10 days (-5.0%). Her stop hit at 4,360 for -$1,800 loss on a $30K position. This happened 14 times in three months. Total losses from ignoring intermarket signals: $42,800. Tonight's action: Open a spreadsheet. Create 6 columns: Date, DXY, 10Y Yield, HYG/TLT, Copper, VIX. Fill in today's values. Write your rule at the top: "If 3+ indicators show risk-off, avoid longs or reduce size." Tomorrow morning, update the dashboard before trading. Check it before EVERY trade entry. If your equity setup conflicts with 3+ intermarket indicators, skip the trade or size smaller.
2. Set Up 3 Critical Intermarket Divergence Alerts (Warns You 1-3 Months Before Major Equity Reversals) — In early 2022, a $2.8B hedge fund missed catastrophic intermarket warnings and lost 22% in six months. They were heavily long SPX (bullish on tech earnings) while ignoring three screaming divergences: 10Y yields breaking out from 1.5% to 2.5% (January-March = major Fed tightening signal), DXY rallying 5% in 8 weeks (risk-off + liquidity drain), and credit spreads (HYG/TLT) widening for 12 straight weeks (credit market pricing in recession). SPX crashed 18% from January to June 2022. If they'd set up simple alerts for yield breakouts, dollar rallies, and credit spread widening, they would have reduced exposure in February and avoided most of the damage. Tomorrow's action: Open TradingView (free account works). Set up three alerts: (1) HYG/SPY ratio falling -3% in 5 days, (2) US10Y yield rising +20bps in 5 days OR breaking above 4.0%, (3) DXY breaking above recent resistance. Write your action plan: "If Alert 1 fires → reduce equity exposure 30-50%. If Alert 2 fires → rotate growth to value. If Alert 3 fires → reduce cyclicals, add defensives."
3. Use the 'Dollar-First' Pre-Trade Check (Eliminates 40% of Trades Fighting the Macro Tide) — Taylor Rodriguez lost $28,400 over two months by ignoring the dollar. He traded equity breakouts on the 15-minute chart without checking DXY. July 2024: He bought NVDA at $125.60 on a 15-minute breakout. What he missed: DXY had just broken out to 106.8 (up +2.8% in two weeks = strong dollar rally = risk-off for equities). NVDA reversed from $126.20 to $122.80 over the next three days. The dollar is the PRIMARY intermarket driver—it affects commodities (inverse), equities (inverse during risk-off), credit spreads, and EM currencies. Tomorrow's action: Open a DXY chart. Identify: (1) Is DXY above or below its 50 EMA? (2) Is DXY up or down in the past 5 days? (3) What is the nearest support/resistance level? Write down current DXY level and trend direction. Tomorrow, before your first equity trade, check DXY again. Ask: "Has it moved +1.5% or more this week?" If yes and rising = reduce equity long size or skip. If yes and falling = favor equity longs.

Part 1: The Intermarket Causality Chain

How Assets Drive Each Other

Primary driver → Secondary effect → Equity impact

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)

Part 3: Intermarket Divergences (Advanced Signals)

Divergence #1: Transports vs Industrials (Dow Theory)

Theory: For rally to be valid, transports (DJT) must confirm industrials (DJI)

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

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

Practical Checklist

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.

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