Intermarket Analysis in Practice: A John Murphy Case Study on the 2020 Crash

Intermarket Analysis in Practice: A John Murphy Case Study on the 2020 Crash

The 2020 COVID-19 crash was a brutal, fast-moving event that caught many traders off guard. However, for those versed in John Murphy's intermarket analysis, the warning signs were flashing red long before the S&P 500 plunged over 30% in a matter of weeks. This was not a "black swan" event for the prepared trader. It was a textbook example of intermarket dynamics at play, a real-time validation of Murphy's core tenets.

The Canary in the Coal Mine: The Bond Market

Long before the equity markets rolled over, the bond market was screaming "risk-off." Throughout January and February 2020, as the SPY was making new all-time highs, the iShares 20+ Year Treasury Bond ETF (TLT) was also rallying strongly. This is a classic intermarket divergence. A flight to the safety of government bonds while stocks are still rising is a major red flag. It signals that "smart money" is seeking protection, anticipating trouble ahead. A trader applying Murphy's principles would have noted this divergence and started to reduce equity exposure, tighten stops, and even build a long position in TLT.

The Dollar's Dash for Safety

As fear began to grip the markets, the US Dollar Index (DXY) started to surge. This is another classic "risk-off" signal. In times of global uncertainty, capital flows into the US dollar as a safe-haven currency. The sharp rally in the DXY in late February and early March 2020 was a clear indication that a major deleveraging event was underway. This had negative implications for commodities and emerging markets, but it also served as a effective confirmation of the bearish thesis for US equities.

The Collapse in Commodities

The commodity markets provided the final piece of the puzzle. The collapse in the price of crude oil (USO) was particularly dramatic, with the front-month futures contract even trading at a negative price at one point. This was a clear signal of a sudden and severe drop in global economic activity. The broader CRB Index also broke down, confirming the deflationary impulse that was taking hold of the global economy. For an intermarket analyst, the message was clear: the global economy was grinding to a halt, and this was not an environment in which to be long equities.

The Equity Market's Day of Reckoning

By the time the S&P 500 finally broke its key support levels in late February 2020, the intermarket evidence was overwhelming. The bond market, the currency market, and the commodity market were all pointing to a major economic downturn. The subsequent crash in the equity market was simply the final domino to fall. A trader who had been paying attention to the intermarket signals would have been well-positioned for the decline, either by being in cash, short the market, or long safe-haven assets like bonds and the dollar.

Actionable Insights from the 2020 Crash

The 2020 crash was a effective reminder of the importance of intermarket analysis. It demonstrated that no market moves in isolation and that the bond, currency, and commodity markets often provide leading signals for the equity market. A trader can build a simple dashboard to monitor these key intermarket relationships: the SPY vs. the TLT, the DXY, and the CRB Index. By looking for divergences and confirmations between these markets, a trader can gain a more holistic view of the market environment and be better prepared for the next major turning point.