CTA Intermarket Analysis & Asset Allocation 1 — Questions and Answers
Question 1: In intermarket analysis, what is the typical historical relationship between bond prices and stock prices?
- They always move in the same direction
- They are unrelated
- They often move inversely — rising bond prices (falling yields) can support stocks, while falling bond prices (rising yields) may pressure stocks (Correct answer)
- Bond prices lead stock prices by exactly one quarter
Correct answer: They often move inversely — rising bond prices (falling yields) can support stocks, while falling bond prices (rising yields) may pressure stocks
Intermarket analysis (popularized by John Murphy) recognizes that rising yields increase borrowing costs and compete with equity returns, typically creating a negative relationship with stock valuations.
Question 2: According to intermarket analysis, what is the typical relationship between commodity prices and bond prices?
- They move together in the same direction
- Rising commodity prices (inflationary) tend to push bond prices lower (yields higher) as inflation erodes bond value (Correct answer)
- Commodity prices and bond prices are uncorrelated
- Bond prices lead commodity prices by 6 months
Correct answer: Rising commodity prices (inflationary) tend to push bond prices lower (yields higher) as inflation erodes bond value
Commodities and bonds historically have an inverse relationship — rising commodity prices signal inflation, which reduces the real return on bonds, pushing bond prices down and yields up.
Question 3: In intermarket analysis, which asset class is typically considered the first to turn at major economic turning points?
- Equities
- Commodities
- Real estate
- Bonds (Correct answer)
Correct answer: Bonds
Bonds typically lead the economic cycle, turning bullish first as recession approaches (falling rates) and turning bearish first when expansion takes hold and inflation pressures build.
Question 4: What does 'relative strength analysis' between two markets tell a technician?
- The absolute price level of each market
- Which market is outperforming the other, helping identify leadership and optimal allocation (Correct answer)
- The volatility difference between two assets
- The correlation coefficient between two price series
Correct answer: Which market is outperforming the other, helping identify leadership and optimal allocation
A relative strength ratio (dividing one asset's price by another's) reveals which is outperforming — rising ratio lines show leadership, helping technicians rotate into stronger markets.
Question 5: The US Dollar Index's relationship with commodity prices (especially gold and oil) is generally:
- Positively correlated — a stronger dollar raises commodity prices
- Negatively correlated — a stronger dollar tends to push commodity prices lower (Correct answer)
- Uncorrelated — they move independently
- Correlated only during recessions
Correct answer: Negatively correlated — a stronger dollar tends to push commodity prices lower
Since most commodities are priced in US dollars, a stronger dollar makes them more expensive for foreign buyers, reducing demand and typically pushing prices lower.
Question 6: In intermarket analysis, 'sector rotation' refers to:
- Rotating out of all equities into cash during bear markets
- The movement of investment capital from one industry sector to another as the business cycle evolves (Correct answer)
- Rotating between domestic and international markets quarterly
- Changing brokerage firms to seek better commissions
Correct answer: The movement of investment capital from one industry sector to another as the business cycle evolves
Sector rotation describes how capital flows through cyclical sectors in a predictable sequence — early-cycle sectors (consumer discretionary, financials) lead, while late-cycle sectors (energy, materials) follow.
CTA Intermarket Analysis & Asset Allocation 1
In intermarket analysis, what is the typical historical relationship between bond prices and stock prices?