What is Intermarket Analysis?

Intermarket analysis is a process that involves evaluating more than a single financial market or asset class as a means of understanding what is happening in the marketplace. The idea behind this approach is to compare and contrast what is happening in each market and then use the data as the basis for identifying trends that are likely to affect the movement of multiple markets. Intermarket analysis is a different approach from single-market analysis, in which only one market or asset class is considered at a time.

The range of markets included in any intermarket analysis will vary, depending on what type of information the analyst wishes to obtain. In some cases, the focus would be on different types of asset classes or markets that are related to a particular nation. At other times, the analysis may have to do with asset classes as they relate to an industry type with a worldwide presence.

An example of a nation-based intermarket analysis would be research that considered and classified activity in a national bond market, commodities market, and stock market, while also evaluating the current status of that nation’s currency in the foreign exchange market. By observing current movements in all these markets, it is possible to determine what type of effect a shift in the value of the currency is having on the commodities that are actively being traded, and how that activity is in turn affecting trading on the stock and bond markets. Proponents of this method note hold that there are subtle but real undercurrents that create a cause-and-effect response which interconnects all these markets. In order to more accurately predict future movements in these markets, considering them as a collective rather than individually is the best approach.

One of the oft-cited benefits for intermarket analysis is that this approach equips the investor to diversify holdings within a portfolio, a strategy that can help minimize the amount of risk that the investor is assuming. Generally speaking, investment professionals discourage investors from investing all their assets in a single market, since events that seriously undermine that market as a whole would likely lead to significant losses. By understanding the relationship between different markets, which factors can initiate a succession of changes in those markets, and basing investment decisions on those understandings, an investor can create an eclectic but balanced combination of investments that makes it possible to offset losses in one market with gains in the others.