Which intermarket relationships should futures traders be aware of?
If you are unaware of what an intermarket relationship is, it is simply the manner in which particular markets behave in relation to each other. Specifically, the correlation between two otherwise unrelated markets. Among the most monitored relationships are those between stocks and bonds, and the U.S. dollar and commodity prices.
Most people assume that stocks and bonds will always be negatively correlated (meaning they move in the opposite direction). This is a simplistic view that suggests investors have only two choices, stocks and bonds; money moved out of one typically coincides with money moved into the other. However, there are times in which both assets can move higher or lower together. For example, in the early stages of the Fed’s Quantitative Easing campaign, the never-ending printing of U.S. dollars, and the subsequent need for liquidity to find a home, caused nearly all asset prices to move higher in lockstep. During this time both the equity market and Treasury securities were able to climb to multi-year highs. In fact, at the time this column was going to editing, statistics on the previous 180 trading days suggest that the S&P 500 futures contract and the 30-year bond future were negatively correlated a mere 40% of the time. This leaves plenty of time (60%) for the markets to be trading outside of what is the conventional expectation.
An interesting intermarket relationship that is surprisingly reliable, but has managed to go under the radar is the negative correlation between the S&P 500 and the Yen. According to stats spanning over the previous 180 trading sessions (at the time of this writing in early June), these two markets traded in opposite directions approximately 91% of the time! Accordingly, those looking for a crack in what was then the magnificent stock rally might have looked to any strength in the Yen vs. the dollar (a higher Yen futures contract, or a lower USD/YEN in FX) as a hint toward a reversal.