John Murphy on Intermarket Analysis and the Sequence of Market Peaks

The following is a summary of our recent interview with market technician John Murphy, which can be accessed on our site here or on iTunes here.

When it comes to the market, “everything affects everything else,” says John Murphy, Chief Technical Analyst for and the author of Trading with Intermarket Analysis.

“If you’re looking at stocks, for example … you have to know what’s going on in bonds. You have to know what’s going on in the dollar. You have to know which sectors of the market are leading and which ones are weak, and if you’re not doing that, you’re leaving too much on the table.”

Today, this type of holistic thinking is much more commonplace but when Murphy first laid it out years ago, such interrelationships were not well understood. For that reason, John Murphy is referred to as the father of intermarket analysis with his books a standard reference among technicians.

Here's what he had to say on our podcast about what's taking place currently in the markets.

Conditions Right Now

We currently see stocks at record levels and interest rates are starting to rise. Generally speaking, bond prices and stocks move in opposite directions, Murphy noted.

“If we go back to the election … we’ve had a really good example of this,” he said. “We had a tremendous surge of money into stocks since November 8th, but that was also accompanied by rising interest rates.”

People became very optimistic about the economy with infrastructure spending, inflation, and other stimulatory forces expected to ramp up. And these same forces that push stock prices up, push bond prices down.

This dynamic also plays an important role within the stock market, Murphy added. For example, over the last several months, as bond yields go up, certain sectors of the market, such as economically-sensitive stocks, do better in that environment. Rate-sensitive stocks such as utilities have done poorly, on the other hand.

The direction of interest rates not only tells us something about the direction of the stock market, but where we want to be positioned, Murphy stated.

The Fed’s rate increase on March 15 was a good example. Though the Fed raised rates, the statement was viewed as more dovish than what people were expecting, which led to a sharp drop in bond yields. We also saw a sharp drop in the dollar.

“I think a lot of people were looking for three rate hikes later this year, and the Fed suggested only two,” Murphy said. “It was slightly less hawkish or a little more dovish than people were looking for.”

Stocks rallied, but when the dollar dropped along with bond yields, we saw a tremendous surge of money into gold, Murphy noted.

The Relationship Between Stocks and Commodities

There’s also an interplay between commodities such as oil and copper and the stock market. In the past, rising commodity prices have generally been good for the economy in the early stages, because it’s a sign of economic growth and that interest rates are moving up, Murphy stated.

“Going into last year … commodities were in a freefall,” he said. “The price of oil was down under … and that was creating fears of deflation. You’ll notice that stocks and commodities bottomed together last January to February, and throughout last year they rose together.”

Rising commodity prices is a sign of global strength. Copper and oil in particular, but also base metals such as aluminum and steel, have been surging over the last 6 months.

That’s a good sign for the global economy, Murphy stated, and for the stock market. It’s not necessarily a good sign for the bond market, however.

Over the last month or two, Murphy said he has been watching the slide in the price of oil and the pullback in base metals such as copper.

“I still think they’re both in uptrends, but this … is a pullback and it’s had me a little bit concerned,” he said. “I think they’ll eventually regroup and start to move back up again.

There will come a point in the cycle where rising commodity prices trigger inflation, and the Fed will get aggressive, he stated.

“We’re nowhere near that,” Murphy said. “The Fed is welcoming inflation at this point.”

Events at Market Tops

In Murphy’s books on intermarket analysis, he notes that a typical sequence of events plays out: we see oil prices rise, bonds start to peak first, then stocks, and finally, near the end of the cycle, we see commodities peak last.

“We’re in the very early stages of (this cycle),” Murphy said. “I do think bond prices have peaked … but basically speaking, commodities bottomed last year. And normally, a commodity bottom will coincide with a bond peak.”

In this scenario, the money coming out of bonds moves into stocks, which we’ve seen, Murphy noted. This is why each market has moved in the opposite direction over the last 6 months.

“Part of the thing driving stocks higher is commodities, which means that commodity prices are reviving,” he said.

After bonds peak, normally stocks stay strong and then commodities start to take off, he added.

Oil is a bit more complicated in this dynamic, he added. Every recession we’ve had in the last 40 years has been proceeded by a spike in the price of oil, which has caused the Fed to raise rates aggressively, which caused a bear market in stocks.

“We’re nowhere near that phase yet,” he said. “Bonds are peaking. I think stocks are close to peaking, and commodities are just really starting to turn.”

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