Most of the literature that looks at asset allocation that links multiple markets has a heavy dose of macro and microeconomics. Generally, macro-micro relationships require the application of econometric models to understand the structural links between the two intertwined fields of the economy. John Murphy does away with strict statistical methods and preserves economic logic with graph-based reasoning.

John Murphy was a technical analyst for CNBC-TV for seven years and a professional analyst for more than 25 years. His career includes a time at Merrill Lynch as Director of Commodity Technical Analysis. John has his own consulting firm, JJM Technical Advisors. He is also president of MurphyMorris, Inc., which was created to produce educational software products and online services for investors.

There are proper reader reviews on Amazon and Google Book Search, to help you decide if you’ll get the book. For those who have just started or are about to read the book, I have summarized the basics in the larger, essential chapters to help you read them faster.

The number to the right of the chapter title is the number of pages contained in that chapter. It is not the page number. The percentages represent how much each chapter makes up out of the 246 total pages, excluding appendices.

1. A review of the 1980s. 16, 6.50%.

2. 1990 and the First Persian Gulf War. 16, 6.50%.

3. The Stealth Bear Market of 1994. 18,7,32%.

4. The 1997 Asian currency crisis and deflation. 14, 5.69%.

5. 1999 Cross-Market Trends Leading to the Top of the Market. 16, 6.50%.

6. Review of the Intermercados Principles. 16, 6.50%.

7. The NASDAQ bubble bursts in 2000. 18, 7.32%.

8. Image of Intermarket in the spring of 2003. 16,6,50%.

9. The fall of the dollar during 2002 boosts raw materials. 14, 5.69%.

10. Change from paper to tangible assets. 14, 5.69%.

11. Futures Markets and Asset Allocation. 20, 8.13%.

12. Intermarket Analysis and Economic Cycle. 20, 8.13%.

13. The impact of the business cycle on market sectors. 18, 7.32%.

14. Diversification with Real Estate. 18, 7.32%.

15. Think globally. 12, 4.88%.

Focus on chapters 3, 7, and 11-14, which make up about 46% of the book. Especially chapters 11-14 are relevant for practical business purposes. Unlike my previous book reviews, where I have summarized the key points for each focus chapter, I will summarize the key points in chapters 3, 7, and 11-14. This is to recognize the connectivity of inter-market relationships across the 4 major asset classes of equities (stocks), bonds, currencies, and commodities. The context of the summary should be viewed from the perspective of a retail options trader.

Here are the relationships between key directional markets in brief.

The US dollar (USD)

• The USD appears when bonds rise under normal conditions, but bonds fall during deflationary periods. The USD goes down when bonds fall, but bonds go up during deflationary periods.
• The dollar rises while commodities fall. The USD goes down as commodities rise.
• The USD appears when stocks rise, but stocks fall during deflationary periods. The USD goes down when stocks fall, but stocks rise during deflationary periods.

The USD remains the most liquid currency of all major traded currencies and maintains its position as the leading global reserve currency, despite growing sentiment for an alternative basket of currencies to replace it.

jumps

• Bonds appear when the USD falls, but the USD rises during deflationary periods. Bonds go down when the USD rises, but the USD falls during deflationary periods.
• Bonuses appear while commodities fall. Bonds are down while commodities are up.
• Bonuses appear as stocks rise. Bonds lead stocks and stocks lag behind bonds. Bonds fall while stocks fall. Once again, bonds lead stocks and stocks lag bonds.

raw Materials

• Commodities rise as USD falls. Commodities fall as the USD rises.
• Commodities appear while bonds fall. Commodities are down while bonds are up.
• Commodities rise when stocks fall. Commodities go down as stocks go up.

Inventory

• Stocks go up as the USD goes up. Stocks fall as USD falls.
• Stocks go up as bonds go up. Stocks fall while bonds fall. Once again, bonds lead stocks and stocks lag bonds.
• Stocks rise while commodities fall. Stocks go down while commodities go up.

For stocks specifically, when trading options on S&P 500 sector indices, consider correlation versus non-correlation with other stock and non-stock traded products. I am stating briefly, the most commonly known relationships that are repeatedly elaborated in the book:

• Changes in energy (XLE), especially oil (OIH, OSX), affect semiconductors (SMH, SOX).
• Utilities (XLU, UTH, UTY) are negatively correlated with semiconductors (SMH, SOX).
• With broad-based equity indices, the highest correlation is between the Dow Jones and the S&P 500.
• Canada benefits from oil rallies as it is the ninth largest producer of crude oil globally. While Japan, a major net oil importer, suffers. The tickers for this interaction would be FXC/XDC (Canadian dollar), FXY/XDN (Japanese yen) and OIH/OSX (oil).
• Gold (XAU, GLD) behaves like the Australian dollar (FXA, XDA). Australia is the third largest gold producer globally.
• The three major currencies that have the strongest correlations with commodities are the Australian dollar, the Canadian dollar, and the New Zealand dollar.
• Gold/Silver (XAU, GLD) has very little correlation with other indices.

A deeper understanding of these interactions can help you build effective pair trading methods.

In conclusion, from a retail options trader’s point of view, always remember that what you are trading is volatility. To trade volatilities in multiple asset classes, use an optional index that represents that particular asset class. Remember, implied volatility can be added to or decreased from your portfolio, as not all asset classes or sectors or individual companies or countries go up or down in value ALL at the same time; and/or, ALL at the same rate.
 

This is not a book comment but a personal observation. It does not address the use of relative strength as a mechanism to enter or exit an asset class, as one asset class weakens or strengthens against another asset class. I have written about relative strength in another article, titled “Stock Option Trading: Fundamental Flaw in Fundamental Analysis and Stock Selection.” Read it as a companion to this article.