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
Afraid to Trade.com

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