Lesson 13 - Intermarket & Sentiment

Why do magazine covers work as contrarian signals?

When a trend hits a cover most are already positioned—leaving little room for further momentum (e.g., 1978 "Death of Equities" cover).

What is Intermarket Analysis?

A branch of technical analysis examining correlations between four asset classes: stocks bonds, commodities, and currencies.

Who is John Murphy and what did he contribute?

John Murphy author of Trading with Intermarket Analysis, showed how asset class relationships reveal business cycles and improve forecasting.

What asset classes and relationships are key in Intermarket Analysis?

Key correlations: Stocks & Bonds Bonds & Commodities, Commodities & the Dollar.

What are hard and soft assets?

Hard assets: Physical commodities like gold and silver (inflation hedge). Soft assets: Paper assets like stocks and bonds.

How do hard and soft assets typically relate?

They usually move oppositely because rising material prices → higher rates → hurt stocks and bonds.

When did this inverse relationship break down?

Between 1998-2012 both gold and stocks often moved in the same direction.

When did the economy shift toward deflation and what caused it?

Deflation began around 1998, starting with the Thai Baht collapse in 1997 (Asian Crisis), then the tech bust (2000), housing bubble (2006), financial crisis (2007), and COVID (2020).

How did deflation affect asset movements?

Stocks fell, Treasury bonds rose, and interest rates declined—stocks and bonds decoupled.

When did the world experience inflationary conditions and what were intermarket patterns?

1970s-late 1990s: Stocks & Bonds: Positive correlation. Bonds led stocks. Bonds & Commodities: Inverse. Dollar & Commodities: Inverse.

What is sentiment in markets and how does it affect tops and bottoms?

Sentiment reflects emotion and value perception.

Tops = extreme bullishness

Bottoms = extreme bearishness → rally.

When is it profitable to go against the crowd?

At sentiment extremes—contrarian strategies work best.

What is the COT report and why does it matter?

Weekly CFTC data showing futures/options positions by major trader groups—helps gauge market sentiment.

Who are the trader categories in the COT report? Commodities: Producer/Merchant

Swap Dealers, Managed Money, Other Reportables. Financial Futures: Dealer/Intermediary, Asset Managers, Leveraged Funds, Other Reportables.

What is insider trading and who reports it?

Officers, directors, or 10%+ owners must report trades via: Form 3 (initial), Form 4 (within 2 days), Form 5 (late filings).

Why is insider buying more meaningful than selling?

Buying signals undervaluation confidence. Key signals include open market purchases and large commitments.

What is the VIX and why is it called the fear index?

The VIX measures 30-day forward volatility (based on S&P 500 options). It rises when markets fall—indicating fear.

What are VIX's limitations?

Hard to interpret in real time and can't be traded directly.

What is short selling and 'days to cover'?

Short selling: Selling borrowed shares to buy back cheaper. Days to cover = Short interest ÷ average daily volume.

What does the mutual fund cash/assets ratio show?

How much cash mutual funds hold.

Low cash = fully invested = possible market top signal.

What is the AAII survey?

A weekly sentiment survey of individual investors by the American Association of Individual Investors.

What is the magazine cover indicator?

A contrarian signal: major trends often reverse after appearing on mainstream magazine covers.