Thursday, October 7, 2010


Figure 1 is a daily chart of the S&P Depository Receipts ETF (symbol: SPY) in the upper panel versus the PowerShares DB US Dollar Bear ETF (symbol: UDN) in the lower panel. 

Figure 1. SPY v. UDN/ daily

UDN moves inverse to the direction of the Dollar Index.  Therefore, UDN will move with equities, which seem to only benefit when the currency is falling.  Got it?  As can be seen in the chart, both SPY and UDN are trading at the upper end of their respective trend channels.  With the Dollar quite oversold and nearing past support levels, a bounce is likely.  

Will stocks decouple from their highly negative correlation with the Dollar Index and start to move higher on their own merit?  No doubt the talk of QE2 and the Fed's willingness to go "all in" at the expense of the Dollar has fueled the recent run up in equities.  However, it is my contention that the Fed is "pushing on a string".  Further stimulus is becoming less and less effective, and at some point (maybe even now), the rise in equity prices is only nominal.  In terms of real purchasing power, stocks will lose in the long term.


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