Thursday, December 2, 2010

Still About the Dollar

While the S&P500 goes on to test the recent highs, let's make no mistake about it that the last 2 days of positive price action have been predicated on a falling Dollar.  Of course, this set of circumstances is no different than the dynamic that has occurred since the March, 2009 lows: that the Dollar and S&P500 have been negatively correlated.  A falling Dollar is good for equities and a rising Dollar is a headwind.  Ok, nothing new here.

Figure 1 shows that correlation (or lack there of) between the S&P Depository Receipts (symbol: SPY) and the PowerShares DB US Dollar Bull (symbol: UPP).  The 40 day and 120 day correlations (bottom 2 graphs) show the high degree with which these 2 instruments are un-correlated.  Like I said nothing new here.

Figure 1. SPY v. UUP

What can be appreciated is that I remain bullish on the Dollar Index, and the weakness seen over the past several days was to be expected.  As I stated in an article on November 11, I had expected UUP to run into resistance in the $23.40 area.  UUP's high for this swing was 23.52 - good enough for government work!!  See figure 2 for a daily chart of the UUP.

Figure 2. UUP/ daily

To me the current pullback in the UUP is nothing more than a pullback, and with prices on the UUP at the short term rising trend line, I view this as a good buying opportunity.  Failure here would cause me to reconsider my strong dollar/ weak equity trade.

How do I know I will be right?  I don't.  Nonetheless, the recent (2 day) surge in equities is being confirmed by the lower Dollar;  it is not being confirmed by higher yields.  I will have more on this later in the week.


the bonocelli said...

i don't get it. The dollar had a great run in the last week, but the indices were largely neutral. Then when we have some moderate decline in the USD, we get a mega rally.

I think the correlation is there when the MMs want it to be. A daily chart (or 60 min chart) going back to March 09 will show that we should have retested the low of 666 earlier this year. BUT we did not!! (I actually use UDN for charting with SPX).

Why...? Because this market is a casino and nothing more.

Last weeks heroic rise of the USD was evidence within itself that the markets go in the direction it is allowed to go.

Guy M. Lerner said...


I am not sure I understand your statement: "I don't get it"....I don't mind the criticism but if you note, I generally try to apply the same analysis to every asset that I write about if it is the Dollar or SPY it is the same as I am looking at price

In any case, my point is that the Dollar is a bullish pattern no matter how much I hate it or the powers that be want it to go down

So I am not sure what you mean by "I don't get it" ...

the bonocelli said...

my only point was that the dollar/equity correlation is not always tit for tat. Sometimes there is a lag period for a response in the market to a change in dollar value. This was most obvious in February 2010 when the dollar was ramping and equities only corrected marginally. Look at the link I provided. The chart shows SPX and UDN (the anti-dollar).

Its easier to recognize correlation with UDN or FXE, in place of USD. Not exact but close enough.

My point is that the market did not follow the dollar, if it did, we would have put in a double bottom (at or near 666).