CTA Intermarket Analysis & Asset Allocation 2 — Questions and Answers
Question 1: Which technical indicator is commonly used to compare the performance of two securities in relative strength analysis?
- MACD histogram
- A ratio or relative strength line (Price A / Price B) (Correct answer)
- Bollinger Bands
- The Stochastic oscillator
Correct answer: A ratio or relative strength line (Price A / Price B)
A relative strength ratio line is created by dividing the price of one security by another — when the line rises, the numerator security is outperforming the denominator.
Question 2: In the context of the business cycle, which sectors are typically associated with the early expansion phase?
- Utilities and healthcare (defensive sectors)
- Consumer discretionary and financials (Correct answer)
- Energy and materials
- Technology and real estate
Correct answer: Consumer discretionary and financials
Early in an economic expansion, consumer spending and lending increase first, benefiting consumer discretionary and financial stocks before the cycle broadens to other sectors.
Question 3: What does a 'yield curve' indicate, and why is it important in technical market analysis?
- The average yield of all stocks in an index
- The relationship between interest rates and maturity dates for bonds; an inverted yield curve has historically preceded recessions (Correct answer)
- The rate at which commodity prices increase annually
- The dividend yield of the S&P 500 relative to earnings
Correct answer: The relationship between interest rates and maturity dates for bonds; an inverted yield curve has historically preceded recessions
The yield curve plots interest rates across different bond maturities — inversion (short rates exceeding long rates) has been a reliable leading indicator of economic recession.
Question 4: In intermarket analysis, gold is often viewed as a leading indicator for which asset class?
- Technology stocks
- Other commodities and inflation expectations, and an inverse indicator for real interest rates (Correct answer)
- Emerging market equities only
- Corporate bonds
Correct answer: Other commodities and inflation expectations, and an inverse indicator for real interest rates
Gold often leads the broader commodity complex and reflects inflation expectations; it tends to rise when real interest rates (nominal rates minus inflation) are declining or negative.
Question 5: The concept of 'intermarket divergence' signals a potential warning when:
- Two correlated markets that normally move together begin to diverge in direction (Correct answer)
- A single market fails to make a new high
- Volume and price diverge within the same market
- Moving averages on different timeframes diverge
Correct answer: Two correlated markets that normally move together begin to diverge in direction
When historically correlated markets (like the S&P 500 and copper prices) diverge, it raises a red flag — one market is potentially giving a misleading signal and a resolution is likely coming.
Question 6: In John Murphy's intermarket model, the typical sequence of market leadership at a cyclical turn from recession to expansion is:
- Stocks → Bonds → Commodities → Dollar
- Bonds → Stocks → Commodities (Correct answer)
- Commodities → Stocks → Bonds
- Dollar → Bonds → Stocks → Commodities
Correct answer: Bonds → Stocks → Commodities
Bonds typically turn first (falling rates stimulate the economy), stocks turn next (anticipating recovery), and commodities turn last (rising demand from actual economic activity increases commodity prices).
CTA Intermarket Analysis & Asset Allocation 2
Which technical indicator is commonly used to compare the performance of two securities in relative strength analysis?