From the May 2013 issue of Futures Magazine • Subscribe!

Trading with Intermarket Analysis

“Trading with Intermarket Analysis”
By John J. Murphy
John Wiley & Sons, Inc.
$85.00; 234 pages

John Murphy is a pioneer in the area of intermarket analysis, since his first book on the subject was published in 1991. At that time no one was paying attention to the value of using that type of analysis for trading or investing purposes. Today intermarket analysis is more widespread and useful in explaining the market’s machinations. Murphy emphasizes that there have been a few changes in the intermarket relationships over the past decade, and that traders need to be aware of the “new normal” in their trading.

He is a well-respected and widely followed technical analyst with more than four decades of stock market experience. According to Murphy, all the financial and global markets are related to one another and global stocks are directly correlated. The broad asset categories covered in the book include stocks, bonds, commodities and currencies.  This book focuses on trading equities and ETFs based on analyzing relationships between two or more investment options using simple ratio (relative strength) charting techniques. For example, by noticing a change in direction of bond prices, a trader will know that it is an early warning of a pending stock market decline or advance, because bond prices change direction before stock prices.

Additionally, intermarket analysis can be used effectively in trading sector rotation strategies. For example, when the economy starts to slow, both the energy and consumer staples stocks tend to outperform. Moreover, when consumer staples is one of the leading sectors, that usually is a signal that stock prices will begin to decline.

Murphy’s approach to explaining the intermarket relationships centers on analyzing the markets chronologically starting with the 1997-1998 Asian currency crisis and then moving on to view the market tops of 2000 and 2007 using many visually appealing multi-color charts. Throughout the book, Murphy uses charts with one index or with multiple indexes in different colors on one chart. Most often he uses ratio charts comparing one index or ETF to another ETF to determine which one is leading in price performance. For example, one chart compares a Consumer Discretionary ETF to a Consumer Staples ETF using their prices and then plotting a ratio of the two as one line.

Murphy presents many intermarket relationships illustrated with high-quality charts. His chapter on ETFs, sector funds and the relationship to the business cycle afford interesting perspectives. Overall, he provides a comprehensive up-to-date look at the importance of using intermarket analysis.

Murphy exhibits his expertise by writing in a simple yet direct style that any reader can grasp immediately. It is interesting that this book’s size is larger than the standard book by the publisher, but the text is in smaller print than usual, while the charts are at one-third of a page and easily readable. This book visually illustrates the importance of including intermarket analysis in making trading decisions. Traders who expect to keep pace with the ever-changing markets need to understand the key relationships clearly spelled out in this wide-ranging review of the subject.

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