Last week in ISM I took a dive into the world of intermarket linkages. I read a great deal about how commodities, stocks, and bonds interact, as well as how different sectors within the stock exchange interact with each other.
The first market interaction I studied was the link between commodities and bonds. In short, commodities and bonds have an inverse relationship. Meaning, when commodities do well, bonds tend to perform poorly. Additionally, a change in the commodity market often leads a change in the bond market. This means that commodities can be used as an early signal that the market is going to change direction.
The second market interaction that I studied was the link between commodities and stocks and bonds and stocks. Commodities influence stocks that directly depend on the price of commodities. For example, one could assume that if the price of gold increases, gold and gold mining stock will also increase in price. The link between bonds and stocks lies in interest rates. Because bond prices are influenced by interest rates, the performance of bonds can be used to determine the performance of stocks that are also influenced strongly by interest rates. Since the bond market leads the stock market, an investor can use the bond market to predict how interest influenced stocks are going to perform in the future.
Comments