Comparing the US Dollar and SP500 Relationship Since 2007 Peak

Dec 30, 2009: 2:50 PM CST

In continuing the thought from yesterday’s post “A Look at the Dual Rallies in the US Dollar Index and S&P 500,” I wanted to show a longer-term perspective of the two markets, starting with the S&P 500’s October 2007 peak.  This will give us more ground to cover in assessing the inverse correlation between the Dollar and the S&P 500.

(Click for full-size image)

It’s not a ‘given’ that these markets are automatically inverse.  In fact, after the October 2007 stock market peak, the US Dollar and the S&P 500 fell together until the Dollar Index bottomed (two horizontal lines) in April and July 2008.

At this point, the inverse relationship became locked in place again, especially as the stock market entered its free-fall in September and October 2008 – that was when the global ‘panic’ began (commodities also fell) and the only market that managed to hold up was the Dollar Index… and that was in relative performance to a basket of other overseas currencies.

Depending on how you view it, the actual Dollar Index made a slight new high as the Stock Market bottomed in March 2009, but in the continuous futures contract (due to roll-over), we see a slightly lower high.

From this point on, the S&P 500 rallied sharply while the Dollar plunged back to test the lows seen in mid-2008.

The Dollar is now rallying with stocks currently holding their own for the time being.

When looking at correlations between markets, realize that market relationships shift as different events occur, so it isn’t as practical to make a long-term correlation.

Many inter-market analysts feel rolling correlations are preferred, which means you take a variety of ‘measures’ to assess correlation, such as looking at one month, six month, one year, two year, etc to determine how strong a correlation holds up over different time periods, instead of taking a single measure and calling that your official correlation.

You don’t want to get caught leaning or diversifying the wrong way when correlations shift, and it’s possible we might be seeing at least a short-term shift right now.

Corey Rosenbloom
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7 Responses to “Comparing the US Dollar and SP500 Relationship Since 2007 Peak”

  1. Ashraf, CMT Says:

    good post, i was looking at it for the past month and was unsure whether the commodities rally was over. early december we had falling commodities (gold and crude), rising dollar and equities, with the 10 year treasury doing nothing much. is inflation push over and we are seeing productivity and real wages leading growth. 3 weeks forward, crude bounced back and treasury falls, so maybe we are not back to 1982 – 83 just yet. but still watching.

  2. thetradedetective Says:

    Hey Corey,

    I'm no forex expert, and havne't really looked at the chart for USD, but I wonder what volume looks like during the rally? Could this be some sort of “December Effect” for the dollar?

  3. Bob Says:

    Consider the macro picture – For the equity markets to move higher, a correction is needed to adjust for the divergences and allow for this rally to settle out. Also, this retracement in the equity markets has certainly taken it’s jolly time. In part, it's due to the government intervention; the actions were meant to be a band aid to stem the bleeding and allow for time to heal the wound. It’s been effective- disaster was averted and consumer confidence is improving, but we are not out of the woods yet.

    Put on your economics thinking cap and ponder what would be the very best scenario going forward? Long term, low borrowing costs for government, business and the consumer; a shallow pull-back in equities and commodities followed by a continuation of the rally; improved consumer confidence and a pick up in spending; and stagnant inflationary pressures. Successfully achieving these goals would be most favorable. It would stimulate the economy, address market divergences, shore up and embolden the confidence of the investor. The last thing we need now is sky rocketing prices and containment actions by the Fed.

    The USD is one big stick the government can manipulate most readily to move the markets and tweak the economy. Watch it closely…

    In light of the macro perspective, now consider the possible Elliot Wave structure to the USD price action… The second high of $90 in early 09 is the completion of wave #2. The recent five wave leg down completes wave #3. The current rally may represent leg (A) of a corrective ABC rally. If this is the case, price may sag to seek support followed by a measured move to higher highs (the completion of the corrective rally and leg #4), then a start to the final leg down #5.

    Food for thought…

  4. TraderSU Says:

    I did some annotation in given chart —

    We may get a feeling that $SPX & $USD have inverse relation and market should go up every time dollar goes down. But my other study did not find it accurate.

    A short term move in dollar can accelerate or decelerate the market ($SPX) but that is it. Dollar can easily go 70 cents up and back to original level and market is still 10 point down. I was not able to find any long term relation between SPX and USD in my study.

    Think of dollar as a battery-boost and break in your hybrid car (SPX).

    If you want your car to slow down, you have two options

    * Lift your feet from the gas pedal and wait.
    * Press the brake (conserve energy for future maneuvers)

    If you want to speed-up your car, you again have two options

    * Floor the gas pedal and wait.
    * Turn on battery-boost (car does it automatically)

    As per my theory, manipulation in market by manipulating $USD is what we all observe as PPT (plunge protection team) activities. And that is strictly short term in nature (very much similar to battery-boost engine).

    A sudden drop in USD while SPX is holding indicates that market wanted to fall but THEY did not allow it.

    A sudden drop in SPX while USD is holding indicates that market is falling naturally.

    A sudden drop in SPX while USD is rising sharply indicates that market was falling naturally but now even more accelerated through PPT.

    Similar three scenarios also apply to UP side when SPX is rising.

    A sudden rise in USD while SPX is holding indicates that market wanted to rise but THEY did not allow it.

    A sudden rise in SPX while USD is holding indicates that market is rising naturally.

    A sudden rise in SPX while USD is falling sharply indicates that market was rising naturally but now even more accelerated through PPT.

    Can we get any trading edge by this analysis? May be – I'm still working on that.

    My 2 cents.

  5. TraderSU Says:

    DX lost 50+ cents overnight but SPX did not move much. What does it tell us?

    Market wants to fall naturally but they are holding it. Possibly delaying it.

  6. Bob Says:

    (PPT) Plunge Protection Team???? Hmmm. That would imply market manipulation wouldn't it. Is the concept of free and unfettered markets a ruse?

    Certianly their is some small time market manipulation occuring for personal or institutional gain, but what of larger scale manipulation to fight a “bigger war”, preservation of the global status quo? And if you use the term, WAR in the absolute sense, “all's fair…”!

    However, it's nice to think the SEC is vigilant and protecting the public!

  7. uioop09 Says:

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    So the mom told her what happend 16 years ago.

    Then the 3rd born child came in who was a boy said “mom mom guess what?”

    The mom said “let me guess you pissed out a bullet.”

    “No i was jacking off and i shot the dog!”

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