Relationship of markets to each other

Quote from Gyles:

Though, stocks and bonds have different meanings and workings in the market. They do have a relationship. ...........................................

If you wish to understand better, I think the following post in ET is real enlightening:

Intermarket Analysis

But, I really wish if some charts could be posted as that would make the picture all the more clearer.
More...

Yes, I agree with you Gyles, these methods are mostly chart based, while the above link is about mechanical back-tested methods.
 
Also if you have patience, read and go over The Alchemy of Finance by George Soros.

He uses the concept of reflexivity in markets to explain how to profit on various price / risk changes in assets and asset classes. The syntax is complicated, but its worth exposing yourself to the ideas he is promoting, and he has the best track record of any trading book author ever.

Excellent overview of reflexivity is found here:

http://en.wikipedia.org/wiki/George_soros
 
One of the most important things we try to teach our traders is "Market Mechanics" - the how and why of inter-market trading. One of the most basic of examples is the S&P Futures and the Equity and Index Equity markets. As the futures traders are able to sell futures above Fair Value during the day, and can't buy them back, they will hedge with, sometimes, all 500 stocks or a basket of stocks, or the index to lock in theoretical profits. They do the opposite when unwinding the position. This accounts for activity in other markets as well, equity options for example. Not everything is simply someone "picking direction" on a stock or a future, so much of the overall trading takes place because of these inter-market plays.

The general "relationships" change based on current interest rates, VIX, commodity prices, etc. so it is tough to always have a "perfect" action and reaction inter market.

Don
 
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