Two of the intermarket relationships that I follow closely to help frame intraday trades are interest rates on Treasury bills/notes and the behavior of financial stocks. When rates come down in Treasuries (i.e., when there is demand for Treasuries and higher prices), it means that investors are in a relatively risk-averse mindset. That often carries forward to stocks.
The second relationship is the relative strength and weakness of shares in the financial sector, including banks and brokers. When these stocks are weak, it means that investors are expressing doubts about the viability of the financial system, and that also often carries forward to stocks.
I went back to the start of 2007 (N = 312 trading days) to capture relationships in the recent market. When yields on the 10-year Treasury note ($TNX) have opened with a decline of more than half a percent, the day's trading session in the S&P 500 Index (SPY, open to close) has averaged a loss of -.17% (31 up, 46 down). By contrast, when yields have opened stronger than that, the coming day's trade in SPY has averaged a gain of .02% (125 up, 110 down). This is a simple example of how fixed income markets help set the tone for the coming day's stock market trade.
Do other intermarket relationships affect the day's performance among stocks? Also going back to the start of 2007, I found that when gold (GLD) opens down by more than .40%, SPY averages a gain of .18% (36 up, 26 down) for that day's trading session (open to close). Conversely, when gold opens stronger than that, the coming day in SPY averages a loss of -.08% (120 up, 130 down). Weak gold, which implies a strong U.S. dollar, appears to set a bullish tone for stocks in the coming day's trade.
I next examined the opening performance of financial stocks (XLF) vs. the day's performance of SPY. When XLF has opened down by half a percent or more, the day session in SPY has averaged a loss of -.08% (30 up, 41 down). On the other hand, when XLF has opened stronger than that, SPY has averaged a loss of -.01% (126 up, 115 down). This makes sense, given the dynamic described above: when investors and traders are showing less confidence in the financial system, their pessimism tends to spill over to the coming day's trading.
Finally, I took a look at the opening performance of energy stocks (XLE) vs. the day's performance of SPY. When XLE has opened down by .60% or more, the coming day session in SPY (open to close) has averaged a gain of .10% (29 up, 28 down). When XLE has opened stronger than that, SPY has averaged a loss of -.06% during the coming day's trade (127 up, 128 down). A weak XLE implies weak oil prices, which are helpful to economic growth and stocks overall. A more robust relationship might be found by examining oil prices themselves.
These are far from perfect relationships, but they are indicative and have informed my intraday trading. When these relationships occur in combination and in the context of multi-day patterns, they are especially helpful (something I encourage readers to research). By understanding the optimism and pessimism of large market participants regarding interest rates, commodities, and financials, we can make inferences about their likely behavior toward equities.
Trading by Regimes
Oil Prices and Stocks
Interest Rates and Stocks