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Now that stocks and the dollar are moving in tandem again, it could be a signal for investors to put more money into US assets.
For much of the 2009 rally off the March lows the two entities had been in reverse lockstep. When the dollar would fall, stocks would rise and vice versa....
But with some upward trends in the economy and the likelihood that the Federal Reserve in the coming months will begin implementing policies to boost the dollar, the two have risen together this year. Analysts see the trend as less a dollar play and more a recovery move, and as a return to normal after the inverse correlation between the stocks and US currency. Jeff Cox, Staff Writer
Let's put this optimism in a larger context, say a decade or two, courtesy of Chris Kimble, a 30-year+ market technician and student of Sir John Templeton, who hails from outside of Kansas City, Kansas.
With his trusty Metastock software, Chris has given us a fascinating overlay of the US Dollar Index and the S&P 500 since 2000 (top chart). Indeed the correlation between the two has often been inverse — very much so over the past two years. As the CNBC article points out, the two have approximately tracked each other for the past two months. Is this synchronization really significant in this on-and-off relationship?
Let's look at another factor. Note the line at 80, a level that, give or take a point or two, has served as support during the 1990s (second chart). It offered support again at the end of 2004, and the dollar rallied for the better part of a year before the onset of another decline. The dollar finally dropped below 80 in September 2007, only a few weeks before the US market peaked.
After bottoming out in the early months of 2008, the dollar has played both sides, with 80 alternating between support and resistance. We're hovering there again — this time against a backdrop of several markets colliding with key trend lines, as this set of four key indexes illustrates.
Today is one-year the anniversary of the S&P 500 recovery following its ominous 666 intraday low on March 9th 2009. What comes next? Will the dollar and the market turn resistance into support and rally higher? Take a breather? Or consolidate sideways? Only time will tell. But the proximity of these trend lines makes for some technical excitement.
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