MTA Educational Foundation University Course – Technical Analysis of the Financial Markets ©2007 Lecture 8 - Intermarket Analysis This lecture series is produced by the Market Technicians Association Educational Foundation based on the detailed class notes of Charles D. Kirkpatrick II, CMT Copyright © All rights are reserved. 1 The Stock Cycle versus The Bond Cycle Two cycles out of phase with one another

MTA Educational Foundation University Course – Technical Analysis of the Financial Markets ©2007 Lecture 8 - Intermarket Analysis This lecture series is produced by the Market Technicians Association Educational Foundation based on the detailed class notes of Charles D. Kirkpatrick II, CMT Copyright © All rights are reserved. 2 The Stock Cycle versus The Bond Cycle In terms of prices, bond prices seem to lead stock prices

MTA Educational Foundation University Course – Technical Analysis of the Financial Markets ©2007 Lecture 8 - Intermarket Analysis This lecture series is produced by the Market Technicians Association Educational Foundation based on the detailed class notes of Charles D. Kirkpatrick II, CMT Copyright © All rights are reserved. 3 The Stock Cycle versus The Bond Cycle But, stocks lead interest rates. Remember: interest rates = the inverse of bond prices

MTA Educational Foundation University Course – Technical Analysis of the Financial Markets ©2007 Lecture 8 - Intermarket Analysis This lecture series is produced by the Market Technicians Association Educational Foundation based on the detailed class notes of Charles D. Kirkpatrick II, CMT Copyright © All rights are reserved. 4 The Stock Cycle versus The Bond Cycle It is easiest to understand the relationship referring to stock prices and bond prices

MTA Educational Foundation University Course – Technical Analysis of the Financial Markets ©2007 Lecture 8 - Intermarket Analysis This lecture series is produced by the Market Technicians Association Educational Foundation based on the detailed class notes of Charles D. Kirkpatrick II, CMT Copyright © All rights are reserved. 5 The Stock Cycle versus The Bond Cycle

MTA Educational Foundation University Course – Technical Analysis of the Financial Markets ©2007 Lecture 8 - Intermarket Analysis This lecture series is produced by the Market Technicians Association Educational Foundation based on the detailed class notes of Charles D. Kirkpatrick II, CMT Copyright © All rights are reserved. 6 Phase 1: Bonds up, stocks down When the economy is weak, bonds usually do better than stocks for a while because the earnings environment is poor. Phase 2: Bonds up, stocks up Then stocks start to move up because lower interest rates get investors to buy in anticipation of an improved economy and, therefore, better earnings. The Stock Cycle versus The Bond Cycle

MTA Educational Foundation University Course – Technical Analysis of the Financial Markets ©2007 Lecture 8 - Intermarket Analysis This lecture series is produced by the Market Technicians Association Educational Foundation based on the detailed class notes of Charles D. Kirkpatrick II, CMT Copyright © All rights are reserved. 7 Phase 3: Bonds down, stocks up Later the economy is actually strengthening, with increased credit demand and improved pricing, and earnings are rising. Phase 4: Bonds down, stocks down Eventually, higher interest rates cause investors to be concerned that economic activity and, therefore, earnings will soon weaken. The Stock Cycle versus The Bond Cycle

MTA Educational Foundation University Course – Technical Analysis of the Financial Markets ©2007 Lecture 8 - Intermarket Analysis This lecture series is produced by the Market Technicians Association Educational Foundation based on the detailed class notes of Charles D. Kirkpatrick II, CMT Copyright © All rights are reserved. 8 Hypothetical Business Cycle Showing Peaks & Troughs Source: “Technical Analysis Explained,” Martin Pring *Gold - used as a proxy for all commodities B B S S G G Expansion Recession B = Bonds S = Stocks G = Gold*

MTA Educational Foundation University Course – Technical Analysis of the Financial Markets ©2007 Lecture 8 - Intermarket Analysis This lecture series is produced by the Market Technicians Association Educational Foundation based on the detailed class notes of Charles D. Kirkpatrick II, CMT Copyright © All rights are reserved. 9 Interaction of Financial Markets During a Typical Business Cycle Bond Market Stock Market Gold* Business cycle trough Business cycle peak Source: “Technical Analysis Explained,” Martin Pring *Gold - used as a proxy for all commodities

MTA Educational Foundation University Course – Technical Analysis of the Financial Markets ©2007 Lecture 8 - Intermarket Analysis This lecture series is produced by the Market Technicians Association Educational Foundation based on the detailed class notes of Charles D. Kirkpatrick II, CMT Copyright © All rights are reserved. 10 Four Markets: Stocks, Bonds, Commodities and Currencies S&P Year Treasuries CRB Index US Dollar Index

MTA Educational Foundation University Course – Technical Analysis of the Financial Markets ©2007 Lecture 8 - Intermarket Analysis This lecture series is produced by the Market Technicians Association Educational Foundation based on the detailed class notes of Charles D. Kirkpatrick II, CMT Copyright © All rights are reserved. 11 Bonds and Stocks Move in the Same Direction Some Times and in the Opposite Direction Other Times S&P Year Treasuries StockCharts.com

MTA Educational Foundation University Course – Technical Analysis of the Financial Markets ©2007 Lecture 8 - Intermarket Analysis This lecture series is produced by the Market Technicians Association Educational Foundation based on the detailed class notes of Charles D. Kirkpatrick II, CMT Copyright © All rights are reserved. 12 CRB Index 30-Year Treasuries Treasury Bonds and the CRB Index In the post 2002 bull market, rising commodity prices were not translated into inflation in the U.S. StockCharts.com

MTA Educational Foundation University Course – Technical Analysis of the Financial Markets ©2007 Lecture 8 - Intermarket Analysis This lecture series is produced by the Market Technicians Association Educational Foundation based on the detailed class notes of Charles D. Kirkpatrick II, CMT Copyright © All rights are reserved. 13 CRB Index US Dollar Index The U.S. Dollar Index and the CRB Index Usually Move in Opposite Directions StockCharts.com

MTA Educational Foundation University Course – Technical Analysis of the Financial Markets ©2007 Lecture 8 - Intermarket Analysis This lecture series is produced by the Market Technicians Association Educational Foundation based on the detailed class notes of Charles D. Kirkpatrick II, CMT Copyright © All rights are reserved. 14 Gold US Dollar Index Gold and the U.S. Dollar Have a Strong Inverse Correlation StockCharts.com

MTA Educational Foundation University Course – Technical Analysis of the Financial Markets ©2007 Lecture 8 - Intermarket Analysis This lecture series is produced by the Market Technicians Association Educational Foundation based on the detailed class notes of Charles D. Kirkpatrick II, CMT Copyright © All rights are reserved. 15 Utility Index US Treasuries Treasury Bonds and the Dow Jones Utility Index Tend to Move in the Same Direction StockCharts.com

MTA Educational Foundation University Course – Technical Analysis of the Financial Markets ©2007 Lecture 8 - Intermarket Analysis This lecture series is produced by the Market Technicians Association Educational Foundation based on the detailed class notes of Charles D. Kirkpatrick II, CMT Copyright © All rights are reserved. 16 Cyclical Stocks Compared to Consumer Stocks The Rising Ratio Indicates Cyclical Stock Outperformance Morgan Stanley Cyclical Index Morgan Stanley Consumer Index Ratio: Cyclical ÷ Consumer StockCharts.com