Intermarket Analysis for the CMT Exam: Test Cross-Asset Relationships

Compare, then explain

Intermarket analysis asks whether evidence from one market changes the reading of another. Rates, currencies, commodities, equities, and credit can interact, but no relationship has a permanent sign. Higher yields might reflect growth, inflation, policy, or risk premiums. State the proposed transmission channel and the period being examined.

The 2026 CMT Program Guide places cross-asset analysis in Advanced Techniques at Levels I and II. Applied work includes relative strength and portfolio weighting. Level I requires sound concepts and chart comparisons; Level II requires interpretation and decisions. A cross-asset chart is evidence, not a causal proof.

Put series on comparable terms

Normalize both price series to 100 at one base date: normalized value = 100 × current value / base value. If an equity index rises from 4,000 to 4,400, it ends at 110; if a currency index falls from 120 to 114, it ends at 95. The first gained 10% and the second lost 5% over that interval. Their simultaneous moves do not establish causation.

A relative-strength ratio is asset price divided by benchmark price at synchronized dates. A sector moving from 50 to 55 while its benchmark moves from 100 to 108 sees its ratio rise from 0.5000 to about 0.5093, or 1.85%. Both rose, but the sector outperformed. An asset may also outperform while falling less than a falling benchmark. Inspect absolute and relative trends separately.

Correlations change with sample, frequency, and regime. Correlating price levels may produce a misleading relationship from two trending series. Use returns, matched dates, and a stated window. In a crisis, both liquidity and correlations can change abruptly.

Worked allocation screen

A committee compares Sector A and B with a broad equity benchmark. Over one review period, the benchmark rises from 200 to 210 (5%), A from 80 to 88 (10%), and B from 60 to 61.20 (2%). A's ratio moves from 0.4000 to 88/210 = 0.4190, a gain of about 4.76%. B's ratio moves from 0.3000 to 61.2/210 = 0.2914, a fall of about 2.86%. A leads on absolute and relative returns.

A commodity basket also rises from 100 to 108. This supports a bullish A thesis only if A's revenues benefit from that commodity. It weakens the thesis if the commodity is primarily an input cost. The label "commodity sensitive" is not enough. A defensible decision is to prefer A only if its ratio holds above a previously specified range, the business channel is verified, and the proposed weight respects the portfolio risk budget. Invalidate the tactical thesis if the ratio closes below that range while the commodity trend reverses.

A manager may still avoid A if the portfolio already owns too much of its industry. The strongest single relative chart does not necessarily produce the strongest portfolio. See portfolio management for weighting.

Build a testable worksheet

For each signal, record the market, transformation, lookback, expected channel, observed sign, alternative explanation, trigger, and invalidation. Align holidays, currencies, dividends, and futures rolls. A foreign stock in local currency may show a gain while its return in the portfolio's base currency is negative. Comparing a total-return bond index with a price-only equity index also distorts results.

Do not count several highly correlated equity sector lines as separate macro confirmations. If evidence conflicts, state the conflict and reduce confidence or position size. A cross-asset relationship may be useful as context even when it is too unstable to drive a standalone trade.

A currency translation check

Suppose a foreign equity index gains 8% in local currency while that currency falls 6% against the portfolio's base currency. The approximate base-currency return is not simply 8% - 6%, although that shortcut is close. The compounded result is 1.08 × 0.94 - 1 = 1.52% before hedging costs and distributions. An analyst comparing the local index with a domestic index that gained 5% might call the foreign market the leader; the base-currency investor actually earned less.

This example shows why the measurement convention belongs in the thesis. A currency-hedged share class, unhedged holding, and local index can have different relative lines. Define which one the investor can own and what benchmark the mandate uses. If the foreign index is quoted at one close and the exchange rate at another, align observation times before calculating. Also ask whether the currency move is an independent signal or simply a consequence of the same macro news that moved equities.

An intermarket view becomes decision-ready when the analyst states the base currency, hedge policy, return series, and portfolio action. Without those details, a persuasive cross-asset chart may answer the wrong investor's question.

When the hypothesized relationship breaks, update the worksheet rather than deleting the inconvenient observation. A failed currency-equity link can reveal a changed hedge policy, a different earnings mix, or a dominant liquidity shock. Record the alternative and decide whether the signal should be retired, resized, or monitored under a new regime.

Traps and self-check

The major traps are data snooping after viewing many pairs, assuming a stock-bond correlation is always negative, equating relative strength with positive absolute return, and using a macro story without a measurable channel. A relationship should earn its place through a plausible mechanism and out-of-sample use.

Self-check: An asset falls 4% while its benchmark falls 9%. Did the asset show relative strength? Answer: Yes, it outperformed by about five percentage points, but its absolute return was still negative. Buying requires a separate judgment about trend, risk, mandate, and benchmark relevance.

Next, make normalized and relative charts for two assets over a clearly specified window. Write one proposed mechanism and one event that would refute it. Compare your reasoning with the official objectives and the relative-strength practice topic.