Link Between Bonds, Stocks and Commodities: Intermarket Analysis

The stock market is influenced by the direction of interest rates. The direction of interest rates (or yield) can be monitored on a minute-to-minute basis by tracking the movements in the Treasury Bond futures contract. Bond prices move in the opposite direction of interest rates or yields. Therefore, when bond prices are rising, yields are falling. That is normally considered positive for stocks. * Falling bond prices, or rising yields, are considered negative for stocks. From a technician's point of view, it is very easy to compare the charts of Treasury Bond futures with the charts of either the S&P 500 cash index or its related futures contract. You'll see that they have generally trended in the same direction. On a short term basis, sudden changes in trend in the S&P 500 futures contract are often influenced by sudden changes in the Treasury Bond futures contract. On a longer range basis, changes in the trend of the Treasury Bond contract often warn of similar turns in the S&P 500 cash index itself. In that sense, bond futures can be viewed as a leading indicator for the stock market. Bond futures, in turn, are usually influenced by trends in the commodity markets.

* In a deflationary environment, bonds and stocks usually decouple. Bond prices rise while stock prices fall.

Treasury Bond prices are influenced by expectations for inflation. Commodity prices are considered to be leading indicators of inflationary trends. As a result, commodity prices usually trend in the opposite direction of bond prices. If you study the market's history since the 1970s, you'll see that sudden upturns in commodity markets (signaling higher price inflation) have usually been associated with corresponding declines in Treasury Bond prices. The flip side of that relationship is that strong Treasury Bond gains have normally corresponded with falling commodity prices. Commodity prices, in turn, are impacted by the direction of the U.S. dollar.