No market is an island
Most traders analyze one market at a time — S&P 500, Apple, gold. But Murphy made the case in 1991, and has been proven right repeatedly since, that all financial markets are linked. Understanding what's happening in stocks requires knowing what bonds, commodities, and the dollar are doing. Ignoring these linkages is like reading one chapter of a novel and claiming to know the plot.
Murphy's premise:
The basic premise of intermarket analysis is that all financial markets are linked in some way. Those relationships may shift on occasion, but they are always present in one form or another. A complete understanding of what's going on in one market isn't possible without some understanding of what's going on in other markets. — Murphy, Technical Analysis of the Financial Markets
The four-market chain
Murphy describes a sequence of relationships that forms the backbone of intermarket analysis:
Dollar → Commodities
A rising U.S. dollar normally has a depressing effect on most commodity prices. A rising dollar is normally considered noninflationary. — Murphy, Technical Analysis of the Financial Markets
The dollar and commodities (especially gold) typically move in opposite directions. A strong dollar makes dollar-denominated commodities cheaper for global buyers, suppressing prices. A weak dollar does the reverse — commodities rally as their real cost rises.
Gold is the most sensitive link. Murphy emphasizes:
The gold market usually acts as a leading indicator for other commodity markets. — paraphrased from Murphy, Technical Analysis of the Financial Markets
Watch gold for early signs of broad commodity trend changes.
Commodities → Bonds
Commodity prices usually trend in the opposite direction of bond prices. Sudden upturns in commodity markets (signaling higher price inflation) have usually been associated with corresponding declines in Treasury Bond prices. — Murphy, Technical Analysis of the Financial Markets
Rising commodity prices signal inflation. Inflation erodes the value of fixed-income payments, so bond prices fall (yields rise). Falling commodity prices signal deflation risk, which supports bonds.
Bonds → Stocks
When bond prices are rising, yields are falling. That is normally considered positive for stocks. Falling bond prices, or rising yields, are considered negative for stocks. — Murphy, Technical Analysis of the Financial Markets
Historically, bonds lead stocks. Murphy notes:
Changes in the trend of the Treasury Bond contract often warn of similar turns in the stock market. Bond futures can be viewed as a leading indicator for the stock market. — Murphy, Technical Analysis of the Financial Markets
The logic: lower interest rates reduce corporate borrowing costs, increase the present value of future earnings, and make bonds less attractive relative to stocks. All three support equity prices.
The complete chain
- Dollar up → Commodities down → Bonds up → Stocks up
- Dollar down → Commodities up → Bonds down → Stocks down
This is the normal inflationary/deflationary cycle. It's not a law — it's a tendency that plays out over months and years.
When the chain breaks: deflation
Murphy added a critical footnote:
In a deflationary environment, bonds and stocks usually decouple. Bond prices rise while stock prices fall. — Murphy, Technical Analysis of the Financial Markets
During deflation (2008, early 2020), money flees stocks and pours into Treasuries as a safe haven. Bonds and stocks move in opposite directions instead of the normal same direction. Recognizing which regime you're in — inflationary or deflationary — determines which version of the chain to apply.
Sector rotation
The intermarket chain doesn't just affect asset classes in aggregate — it drives sector rotation within the stock market.
Murphy explains:
When bonds are strong and commodities weak, interest rate-sensitive stock groups — such as utilities, financial stocks, and consumer staples — usually do well. At the same time, inflation-sensitive stock groups — like gold, energy, and cyclical stocks — usually underperform. — paraphrased from Murphy, Technical Analysis of the Financial Markets
And the reverse: when commodities are strong relative to bonds, energy and materials outperform while utilities and financials lag.
This means the bond-to-commodity ratio tells you which sectors to overweight:
| Bond/Commodity Ratio | Favored Sectors | Lagging Sectors |
|---|---|---|
| Rising (bonds beat commodities) | Utilities, Financials, Tech, Consumer Staples | Energy, Materials, Cyclicals |
| Falling (commodities beat bonds) | Energy, Materials, Gold Miners, Cyclicals | Utilities, Financials, Growth Tech |
Murphy also notes that related stock groups often lead their underlying commodity or bond market — utility stocks lead bond prices; gold mining shares lead gold prices. These stock sectors become leading indicators for the broader intermarket chain.
How to use this practically
You don't need to trade bonds and commodities to benefit from intermarket analysis. The framework gives you:
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Context for stock trades. If bonds are rolling over and commodities are surging, a new long position in utility stocks faces headwinds — even if the chart looks bullish.
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Early warnings. Bond market tops (yield bottoms) often precede stock market tops by months. If Treasury yields are breaking out to the upside while stocks make new highs, the intermarket chain is flashing caution.
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Sector selection. Overweight sectors aligned with the current intermarket regime, underweight those fighting it.
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Confirmation. A stock breakout that aligns with the intermarket chain has higher odds than one that contradicts it. A gold mining stock breaking out while the dollar is strengthening is swimming upstream.
The tools you already have — trendlines, moving averages, RSI — can be applied to bond futures, commodity indexes, and the dollar index just as easily as to stocks. Intermarket analysis doesn't require new tools; it requires a wider lens.
Quick check
Commodity prices are surging and the dollar is falling. According to Murphy's intermarket chain, what's the expected effect on bonds?
What you now know
- Four markets are linked: Dollar → (inverse) Commodities → (inverse) Bonds → (same) Stocks.
- In a deflationary environment, bonds and stocks decouple — bonds become a safe haven while stocks fall.
- Sector rotation follows the bond/commodity ratio: bonds strong = overweight utilities, financials; commodities strong = overweight energy, materials.
- Stock groups often lead their underlying commodity or bond market.
- You don't need new tools — apply your existing TA toolkit to bonds, commodities, and the dollar for a wider market view.
Next: Seasonality & Calendar Patterns — Sell in May, the January effect, election cycles, and what Kaufman's data actually shows about these well-known anomalies.