BECAUSE OF THEIR DIFFERENT COMPOSITION, THESE TWO COMMODITYINDEXES TRENDED IN OPPOSITE DIRECTIONS DURING MOST OF 1989.
INTEREST RATES VERSUS THE COMMODITY INDEXES
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FIGURE 7.7THE CRB INDEX VERSUS TREASURY BOND YIELDS FROM 1985 TO 1989. A STRONG VISUALCORRELATION CAN BE SEEN BETWEEN THESE TWO MEASURES. DURING THE SECOND HALFOF 1988 AND MOST OF 1989, INTEREST RATES AND THE CRB INDEX DROPPED TOGETHER.
CRB Futures Price Index
Remember that the main purpose in performing intermarket analysis is not todo economic analysis, but to aid analysts in making trading decisions. The pertinent question is which of the two commodity indexes fit into the intermarket scenario better, and which one do the financial markets seem to be listening to. To helpanswer that question, refer to the most basic relationship in intermarket analysis—commodities versus interest rates. In previous chapters, the close positive link between commodity prices and interest rates was established. Compare interest rateyields to both of these commodity indexes to see if one has a better fit than the other.INTEREST RATES VERSUS THE COMMODITY INDEXES
Figure 7.7 compares 30-year Treasury bond yields with the CRB Index. In Chapter 3a similar chart was examined to demonstrate the strong fit between both measures.Although the fit is not perfect, there appears to be a close positive correlation betweenbond yields and the CRB Index. Both measures formed a "head and shoulders" bottomin 1986 and 1987. Except for the upward spike in interest rates in the fall of 1987, the
peaks and troughs in bond yields were remarkably close to those in the CRB Index.An important peak in bond yields occurred in mid-1988 which corresponded closelywith the major CRB top. Both measures then declined into August of 1989. Upwardpressure in the CRB Index was beginning to pull bond yields higher as 1989 ended.Figure 7.8 shows that the correlation between the JOC Index and bond yieldswas completely "out of sync" from mid-1988 to the end of 1989. While bond yieldswere declining on reduced inflation expectations, the JOC Index continued to setnew recovery highs. The JOC Index was predicting higher inflation and continuedeconomic growth while declining bond yields were predicting just the opposite.Figure 7.9 compares all three measures. The upper chart compares the CRB Index and the JOC Index from the fall of 1988 to the end of 1989. The lower chartshows 30-year Treasury bond yields through the same time span. The chart shows amuch stronger correlation between bond yields and the CRB Index. For most of 1989,bond yields trended in the opposite direction of the JOC Index. In the first half of theyear, bond yields fell as the JOC Index continued to set new recovery highs. As theyear ended, bond yields are showing signs of bouncing as the JOC Index is dropping.
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COMMODITY INDEXES
FIGURE 7.8THE JOURNAL OF COMMERCE (JOC) INDEX AND TREASURY BOND YIELDS FROM 1985 TO1989. THESE TWO MEASURES CORRELATE CLOSELY UNTIL 1989. DURING THAT YEAR, TREASURY BOND YIELDS DROPPED SHARPLY WHILE THE JOC INDEX CONTINUED TO SET NEWHIGHS.
During that time span, the trader would have had little success trying to fit the JOCIndex into his intermarket scenario. By contrast, the linkage between the CRB Indexand bond yields appears to have held up quite well during that period.
THE CRB FUTURES GROUP INDEXES
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FIGURE 7.9TREASURY BONDS YIELDS (BOTTOM CHART) COMPARED TO THE CRB FUTURES INDEX ANDTHE JOURNAL OF COMMERCE (JOC) INDEX (UPPER CHART) DURING 1989. DURING 1989,BOND YIELDS HAD A CLOSER CORRELATION TO THE CRB INDEX THAN TO THE JOC INDEX.
more closely to price trends in the more evenly-balanced CRB Index than in any ofthe indexes that rely exclusively on industrial prices. And this is our primary areaof concern. All of the other commodity indexes have value and should be monitoredin order to obtain a comprehensive picture of commodity price trends. However, Istill prefer the CRB Futures Index as the primary commodity index for intermarketanalysis.
THE CRB INDEX-A MORE BALANCED PICTURE
Inflation pressures subsided throughout 1989. At the producer level, inflation hoveredaround 1 percent in the second half of the year compared to more than 9 percentduring the first half. As the Spot Foodstuffs Index shows, most of that decline inprice pressures could be seen in the food markets and not the industrials. Going intothe fourth quarter of 1989, food prices began to stabilize. At the wholesale level,food prices saw their strongest advance in two years. This pickup in food inflationoccurred just as industrial prices were starting to weaken.The evidence shown on the accompanying charts seems to support the inclusionof agricultural markets in the inflation picture. As always, the final judgment restswith the markets. It seems that the financial markets, and bonds in particular, respond
THE CRB FUTURES GROUP INDEXES
To look "beneath the surface" of the CRB Futures Index, it's also useful to consult theCRB Futures Group Indexes published by the Commodity Research Bureau. Thesegroup indexes allow us to quickly determine which commodity groups are contributing the most to the activity in the CRB Index. The seven commodity sub-indexes areas follows:ENERGY:GRAINS:IMPORTED:
Crude oil, heating oil, unleaded gasolineCorn, oats (Chi.), soybean meal, wheat (Chi.)Cocoa, coffee, sugar "11"
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INDUSTRIALS:OILSEED:MEATS:METALS:
COMMODITY INDEXES
Cotton, copper, crude oil, lumber, platinum, silverFlaxseed, soybeans, rapeseedCattle (live), hogs, porkbelliesGold, platinum, silver
All of the commodities in the commodity group indexes are included in the CRBFutures Price Index with the exception of unleaded gasoline, flaxseed, and rapeseed.Also, notice that some commodities (crude oil, platinum, and silver) are includedin two group indexes. The Commodity Research Bureau also publishes two financialFutures Group Indexes—Currency and Interest Rates. They include:CURRENCY:INTEREST RATES:
THE CRB INDEX VERSUS GRAINS, METALS, AND ENERGY GROUPS
FIGURE 7.10THE CRB FUTURES PRICE INDEX VERSUS THE CRB GRAINS FUTURES INDEX FROM 1985 TO1989. A STRONG HISTORICAL CORRELATION EXISTS BETWEEN THE GRAIN MARKETS ANDTHE CRB INDEX. THE 1988 PEAK IN THE CRB INDEX WAS CAUSED PRIMARILY BY THE GRAINMARKETS.CRB Futures Price Index
British pound, Canadian dollar, Deutsche mark,Japanese yen, Swiss francTreasury Bills, Treasury Bonds, Treasury Notes
The main value in having these nine Futures Group Indexes available is the ability to study groups as opposed to individual markets. It's not unusual for one market,such as platinum in the Metals sector or heating oil in the Energy sector, to dominatea group for a period of time. However, more meaningful trends are established whenthe activity in one or two individual markets is confirmed by the group index. Groupanalysis also makes for quicker comparison between the nine sectors, including thecommodity and financial groups. By adding any of the popular stock indexes to thegroup, the trader has before him the entire financial spectrum of currency, commodity,interest rate, and stock markets, which greatly facilitates intermarket comparisons.THE CRB INDEX VERSUS GRAINS, METALS, AND ENERGY GROUPS
I mentioned earlier in the chapter that the three main groups to watch in the commodity sector are the grains, metals, and energy markets. Although some other individualmarkets may play an important role on occasion, these three groups have the mostconsistent influence over the CRB Index. Figures 7.10 to 7.12 compare the CRB Indexto these three CRB group indexes in the five-year period from 1985 through 1989.Figure 7.10 reveals, in particular, how the upward spike in the grain markets in thespring and summer of 1988 marked the final surge in the CRB Index.Figure 7.11 shows that the oil market bottom in 1986 was one of the major factorsthat started the general commodity rally that lasted for two years. A falling oil marketin the first half of 1988 warned that the CRB rally was on shaky ground. An upwardtrending oil market in the second half of 1989 quietly warned of growing inflation' pressures in that sector, which began to pull the CRB Index higher during the finalquarter of that year.Figure 7.12 demonstrates the leading characteristics of the Precious Metals Indexrelative to the CRB Index. The strong metals rally in the spring of 1987 (influencedby the oil rally) helped launch the CRB bullish breakout. Falling metals prices duringthe first half of 1988 (along with oil prices) also warned that the CRB rally was toonarrowly based. Stability in the metals sector during the summer of 1989 (partiallyas a result of the strong oil market) and the subsequent October-November 1989 rallyin the precious metals played an important role in the CRB upturn during the secondhalf of that year. To fully understand what's happening in the CRB Index, monitorall of the Futures Group Indexes. But pay special attention to the grains, energy, andmetals.
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CRB Grains Futures Index
COMMODITY INDEXESFIGURE 7.11
—
THE CRB FUTURES PRICE INDEX VERSUS THE CRB ENERGY FUTURES INDEX FROM 1985 TO1989. THE ENERGY MARKETS ARE ALSO IMPORTANT TO THE CRB INDEX AND SHOULD BEGIVEN SPECIAL ATTENTION. THE 1986 BOTTOM IN THE CRB INDEX WAS CAUSED PRIMARILYBY THE BOTTOM IN OIL PRICES.
ENERGY VERSUS METALS MARKETS
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FIGURE 7.12THE CRB FUTURES PRICE INDEX VERSUS THE CRB PRECIOUS METALS INDEX FROM 1985 TO1989. THE PRECIOUS METALS GROUP IS ALSO IMPORTANT TO THE OVERALL TREND OF THECRB INDEX. THE METALS MARKETS USUALLY LEAD THE CRB INDEX. THE LACK OF BULLISHCONFIRMATION BY THE METALS IN 1988 WAS A WARNING OF A PEAK IN THE CRB INDEX. AMETALS RALLY IN LATE 1989 ALSO HELPED LAUNCH A CRB INDEX RALLY.
CRB Futures Price IndexCRB Futures Price Index
ENERGY VERSUS METALS MARKETS
I've already alluded to the interplay between the oil and precious metals markets.Although the fit between the two is far from perfect, it's useful to keep an eye onboth. Since both are leading indicators of inflation, it stands to reason that majormoves in one sector will eventually have an effect on the other. Figure 7.13 comparesthe CRB Energy Futures Index to the CRB Precious Metals Futures Index from 1985through the end of 1989. Although they don't always trend in the same direction, theydo clearly seem to impact on one another. Although the metals had been trendingirregularly higher going into mid-1986, they didn't begin to soar until the summer ofthat year when the oil price collapse had been reversed to the upside.Both sectors dropped through the second half of 1987 and most of 1988, althoughthe 1987 peak occurred in the precious metals markets first. Oil prices rose throughmost of 1989. However, it wasn't until the second half of 1989, as the oil rally gatheredmore momentum, that the inflationary implications of rising oil prices began to have abullish impact on precious metals. And, of course, if both of those sectors are moving
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COMMODITY INDEXES
FIGURE 7.13THE CRB ENERGY FUTURES INDEX VERSUS THE CRB PRECIOUS METALS FUTURES INDEX FROM1985 TO 1989. SINCE THESE TWO COMMODITY GROUPS ARE LEADING INDICATORS OF INFLATION, THEY USUALLY IMPACT ON EACH OTHER. THE METALS RALLY IN 1986 WAS HELPEDBY A BOTTOM IN OIL. BOTH PEAKED TOGETHER IN MID-1987. BOTH RALLIED TOGETHERTOWARD THE END OF 1989.CRB Energy Futures Index
CRB Precious Metals Futures Index
METALS AND ENERGY FUTURES VERSUS INTEREST RATES
the financial community (bond traders, in particular) of a possible uptick in inflation.The bond market seems especially sensitive to trends in oil futures. The trend in goldand oil also plays a decisive role in the attractiveness of gold and oil shares, whichwill be discussed in Chapter 9.METALS AND ENERGY FUTURES VERSUS INTEREST RATES
If precious metals and oil prices are so important in their own right, and if they havesuch a dominant influence on the CRB Index, do they correlate with interest rates?This is always our acid test. You can judge for yourself by studying Figures 7.14and 7.15. The bottom in bond yields in 1986 was very much influenced by rallies inboth oil and metals. Conversely, tops in the metals and oil in mid-1987 preceded thetop in bond yields by a few months. As 1989 ended, upward pressure in the metalsand oils was able to check the decline in bond yields and began to pull bond yieldshigher.
FIGURE 7.14TREASURY BOND YIELDS (BOTTOM CHART) VERSUS THE CRB PRECIOUS METALS FUTURESINDEX FROM 1985 TO 1989. SINCE PRECIOUS METALS ARE LEADING INDICATORS OF INFLATION, THEY HAVE AN IMPACT ON INTEREST RATE TRENDS. METALS PEAKED FIRST IN 1987AND THEN
BOTH
MEASURES
DROPPED
UNTIL THE FOURTH QUARTER OF 1989.
CRB Precious Metals Futures Index
in tandem, their combined effect will have a profound influence on the CRB Index.It's always a good idea for metals traders to watch the oil charts, and vice versa.THE INTERMARKET ROLES OF GOLD AND OIL
There are times when the gold and oil futures markets, either in tandem or separately,become the dominant markets in the intermarket picture. This is partly because thefinancial community watches both markets so closely. The price of gold is quoted onmost media business stations and is widely watched by investors. For short periodsof time, either of these two markets will have an effect on the price of bonds. Of thetwo, however, oil seems to be more dominant.In the fall of 1989, surging gold prices (partially the result of a sagging dollar andstock market weakness) sent renewed inflation fears through the financial marketsand helped keep a lid on bond prices. Unusually cold weather in December of 1989pushed oil prices sharply higher (led by heating oil) and caused some real fears in
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30-Year Treasury Bond Yields
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COMMODITY INDEXES
F?GURE 7.15TREASURY BOND YIELDS (BOTTOM CHART) VERSUS THE CRB ENERGY FUTURES INDEX (UPPERCHART) FROM 1985 TO 1989. ENERGY PRICES ALSO INFLUENCE INTEREST RATE TRENDS. BOTHTURNED UP IN 1986. OIL PRICES TURNED DOWN FIRST IN 1987. A BULLISH BREAKOUT INENERGY PRICES IN LATE 1989 IS BEGINNING TO PULL INTEREST RATE YIELDS HIGHER.CRB Energy Futures Index
THE CRB INDEX VERSUS THE PPI AND THE CPI
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modifies, and interest rate differentials (the yield curve)—in setting monetary policy.A couple of weeks later, Fed Governor Angell added that movements in commodityprices had historically been a good guide to the rate of inflation, not just in the UnitedStates but globally as well.Such admissions by the Fed Governors were significant for a number of reasons.The Fed recognized, in addition to the reliability of commodity markets as a leadingindicator of inflation, the importance of the interplay between the various financialmarkets. The discounting mechanism of the markets was also given the mantle ofrespectability. The Fed seemed to be viewing the marketplace as the ultimate criticof monetary policy. Fed governors were learning to listen to the markets instead ofblaming them. As added confirmation that some Fed members had become avid commodity watchers, the recorded minutes of several Fed meetings included reference toactivity in the commodity markets.Rising commodity prices are associated with an increase in inflation pressuresand typically lead to Fed tightening. Falling commodity prices often precede an easiermonetary policy. Sometimes activity in the commodity markets make it more difficultfor the Fed to pursue its desired monetary goals. During the second half of 1989, thefinancial community was growing impatient with the Federal Reserve for not drivingdown interest rates faster to stave off a possible recession.One of the factors that prevented a more aggressive Fed easing at the end of1989 was the relative stability in the commodity price level and the fourth quarterrallies in the precious metals and oil markets (Figure 7.16). To make matters worse,an arctic cold snap in December of 1989 caused oil futures (especially heating oil) toskyrocket and raised fears that early 1990 would see a sharp uptick in the two mostwidely-watched inflation gauges, the Producer Price Index (PPI) and the ConsumerPrice Index (CPI). The reasons for those fears, and the main reason the Fed watchescommodity prices so closely, is because sooner or later significant changes in thecommodity price level translate into changes in the PPI and the CPI, which bringsus to the final point in this discussion: The relationship between the CRB Index, theProducer Price Index, and the Consumer Price Index.THE CRB INDEX VERSUS THE PPI AND THE CPI
The moral seems to be this: For longer-range intermarket analysis, the CRB Indexis superior to either the metals or oil. However, there are short periods when eitherof these two markets, or both, will play a dominant role in the intermarket analysis.Therefore, it's necessary to monitor the gold and oil markets at all times.COMMODITIES AND FED POLICYA couple of years ago, then Treasury Secretary James Baker called for the use of acommodity basket, including gold, as an indicator to be used in formulating monetary policy. Fed Governors Wayne Angell and Robert Heller also suggested usingcommodity prices to fine-tune monetary policy. Studies performed by Mr. Angelland the Fed supported the predictive role of commodity prices in providing earlywarnings of inflation trends.In February of 1988, Fed Vice Chairman Manuel Johnson confirmed in a speechat the Cato Institute's monetary conference that the Fed was paying more attentionto fluctuations in the financial markets—specifically movements in the dollar, com-
Most observers look to popular inflation gauges like the Consumer Price Index (CPI)and the Producer Price Index (PPI) to track the inflation rate. The problem with thesemeasures, at least from a trading standpoint, is that they are lagging indicators. ThePPI measures 2700 prices at the producer level and is a measure of wholesale pricetrends. The CPI is constructed from 400 items, including retail prices for both goodsand services, as well as some interest-related items (about one-half of the CPI is madeup of the price of services and one-half of commodities). Both indexes are releasedmonthly for the preceding month. (I'm referring in this discussion to the CPI-W,which is the Consumer Price Index for Urban Wage Earners and Clerical Workers.)The CRB Index measures the current trading activity of 21 raw materials every15 seconds. (A futures contract on the CRB Index was initiated in 1986 by the NewYork Futures Exchange, which also provides continuous updating of CRB Index futures prices.) Inasmuch as commodity markets measure prices at the earliest stage ofproduction, it stands to reason that commodity prices represented in the CRB Indexshould lead wholesale prices which, in turn, should lead retail prices. The fact thatCRB Index prices are available instantaneously on traders' terminal screens can alsocreate an immediate impact on other markets.
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COMMODITY INDEXES
FIGURE 7.16A SURGE IN OIL PRICES DURING THE FOURTH QUARTER OF 1989, SIGNALING HIGHER INFLATION, HAD A BEARISH INFLUENCE ON BOND PRICES AND HELPED PUSH INTEREST RATEYIELDS HIGHER.March Treasury Bonds
THE CRB INDEX VERSUS THE PPI AND THE CPI
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FIGURE 7.17THE CRB FUTURES PRICE INDEX VERSUS ANNUAL RATES OF CHANGE FOR THE CONSUMERPRICE INDEX (CPI-W) AND THE PRODUCER PRICE INDEX (PPI) FROM 1971 TO 1987. (SOURCE:CRB INDEX WHITE PAPER: AN INVESTIGATION INTO NON-TRADITIONAL TRADING APPLICATIONS FOR CRB INDEX FUTURES, PREPARED BY POWERS RESEARCH, INC., 30 MONTGOMERYSTREET, JERSEY CITY, NJ 07302, MARCH 1988.)CRB Index versus CPI-W and PPI(Monthly Data from March 1971 to October 1987)
February Crude Oil
Despite their different construction and composition, there is a strong statisticalcorrelation between all three measures. Comparing annual rates of change for theCPI and the PPI against cash values of the CRB Index also reveals a close visualcorrelation (see Figures 7.17 and 7.18). The PPI is more volatile than the CPI andis the more sensitive of the two. The CRB, representing prices at the earliest stageof production, tracks the PPI more closely than it does the CPI. Over the ten yearsending in 1987, the CRB showed a 71 percent correlation with the PPI and a 68percent correlation with the CPI. During that same period, the CRB led turns in thePPI by one month on average and the CPI by eight months. (Source: CRB Index WhitePaper: An Investigation Into Non-Traditional Trading Applications for CRB IndexFutures, New York Futures Exchange, 1988, prepared by Powers Research, Inc. JerseyCity, NJ.)From the early 1970s through the end of 1987, six major turning points wereseen in the inflation rate, measured by annual rates of change in the CPI. The CRBIndex led turns in the CPI four times out of the six with an average lead time of eightmonths. The two times when the CRB Index lagged turns in the CPI Index (1977 and
1980), the lag time averaged seven and a half months. The 1986 bottom in the CRBIndex, which signaled the end of the disinflation of the early 1980s, led the upturnin the CPI by five months.What these statistics, and the accompanying charts suggest, is that the CRB Indexcan be a useful guide in helping to anticipate changes in the PPI and CPI, often with alead time of several months. Where the CRB Index lags behind the CPI (as happenedin 1980 when the CRB peak occurred seven months after the downturn in the CPI),the commodity action can still be used as confirmation that a significant shift in theinflation trend has taken place. (Gold peaked in January of 1980, correctly signalingthe major top in the CPI in March of that year and the CRB Index in November.)A rough guide used by some analysts is that a 10 percent move in the CRB Indexis followed within six to eight months by a 1 percent move in the CPI in the samedirection.
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COMMODITY INDEXES
FIGURE 7.18A COMPARISON OF 12-MONTH RATES OF CHANGE BETWEEN THE CRB FUTURES PRICE INDEXAND THE CONSUMER PRICE INDEX (CPI) FROM 1970 TO 1989. (SOURCE: CRB COMMODITYYEAR BOOK 1990, COMMODITY RESEARCH BUREAU, 75 WALL STREET, NEW YORK, NY 10005.)Rate of Change (12-Month Span)CRB Futures Price Index and Consumer Price Index (CPI)
THE CRB, THE PPI, AND CPI VERSUS INTEREST RATES
The study cited earlier also shows why it's dangerous to rely on PPI and CPI numbersto trade bonds. The same study suggests that the CRB Index is a superior indicatorof interest rate movements. In the 15 years from 1973 to 1987, the CRB Index showedan 80 percent correlation with ten-year Treasury yields, while the PPI and CPI hadcorrelations of 70 percent and 57 percent, respectively. From 1982 to 1987, the CRBhad a correlation with Treasury yields of 90 percent, whereas the PPI and CPI hadcorrelations with interest rates of 64 percent and —67 percent, respectively. (In previous chapters, the strong negative correlation of the CRB Index to Treasury bondprices was discussed.)In every instance, correlations between the CRB Index and constant yields tomaturity on ten-year Treasury securities are consistently higher than either of theother two inflation measures. Bond traders seem to pay more attention to the CRBIndex, which provides instant inflation readings on a minute-by-minute basis, andless attention to the PPI and CPI figures which, by the tune they're released on amonthly basis, represent numbers which are several months old.
SUMMARY
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SUMMARY
This chapter took a close look at the various commodity indexes. We compared theCRB Futures Index to the CRB Spot Index, and showed that the CRB Spot Indexcan be further subdivided into the Spot Raw Industrials and the Spot Foodstuff Indexes. Although the CRB Spot Index is more influenced by the Raw Industrials, theCRB Index has a closer correlation with the Foodstuffs. We compared the Journal ofCommerce (JOC) Index, which is comprised solely of industrial prices, to the morebalanced CRB Futures Index, and showed that the latter Index correlates better withinterest rates. We discussed why it's dangerous to exclude food prices completelyfrom the inflation picture. Although it's important to keep an eye on all commodityindexes, it's also necessary to know the composition of each.The nine CRB Futures sub-groups were considered as another way to monitorthe various market sectors and to make intermarket comparisons. Special attentionshould be paid to the grain, metals, and oil sectors when analyzing the CRB Index.Metals and oil prices are also important in their own right and often play a dominantrole in intermarket analysis.The Federal Reserve Board keeps a close watch on commodity price trends whileformulating monetary policy. This is because significant price trends in the commodity price level eventually have an impact on the Producer Price Index (PPI) and theConsumer Price Index (CPI).
8International Markets
The chapters on the intermarket field have concentrated so far on the domesticpicture. We've examined the interrelationships between the four principal financialsectors—currencies, commodities, interest rates, and equities. The purpose was toshow that the trader should always look beyond his particular area of interest. Sinceeach of the four financial sectors is tied to the other three, a complete technicalanalysis of any one sector should include analysis of the other three. The goal isto consider the broader environment in which a particular market is involved. Let'scarry the intermarket approach a step further and add an international dimension tothe analysis.The primary goal in this chapter will be to put the U.S. stock market into a globalperspective. This will be accomplished by including as part of the technical analysisof the U.S. market an analysis of the other two largest world markets, the British andJapanese stock markets. I'll show how following the overseas markets can providevaluable insights into the U.S. stock market and why it's necessary to know what'shappening overseas.How global inflation and interest rate trends impact on world equity markets willbe considered. By comparing these three world economic measures, the same principles of intermarket analysis that have been used on a domestic level can be appliedon a global scale. I'll show why these global intermarket comparisons suggested thatthe world stock markets entered the 1990s on very shaky ground.The world's second largest equity market is located in Japan. Going into 1990, intermarket analysis in that country showed a weakening currency and rising inflation.Monetary tightening to combat inflation pushed interest rates higher and bond priceslower—a potentially lethal combination for the Japanese stock market. I'll show howan intermarket analysis of the Japanese situation held bearish implications for theJapanese stock market and the potentially negative implications that analysis carriedfor the U.S. stock market.WORLD STOCK MARKETSFigures 8.1 through 8.5 compare the world's three largest stock markets—UnitedStates, Japan, and Britain—in the five-year period from 1985 through the end of 1989.The main purpose of the charts, which overlay all three markets together, is simply to122
WORLD STOCK MARKETS
123
show that global markets generally trend in the same direction. This shouldn't comeas a surprise to anyone. On a domestic level, individual stocks are influenced by bulland bear markets in the stock market as a whole. Not all stocks go up or down at thesame speed or even at exactly the same time, but all are influenced by the overridingtrend of the market. The same is true on an international level. The world experiencesglobal bull and bear markets.Although the stock markets of individual countries