Author’s apology: Let me start by saying, “I’m sorry.” This article deals with the painful vaporization of American wealth that occurred last fall (a time most would rather forget). Furthermore, it may be prove to be a buzzkill to those high on optimism right now. And to make Matters even worse, it contains a sports-entertainment image that some may find disturbingly homo-erotic.
Sept. 19 – Nov. 20, 2008
The S & P 500 lost over 39% (SPY = red line). The other thing on the chart is the dollar bull index (UUP) which moved up an astonishing 13.5%. So, is it odd the the US dollar had it’s best 60-day performance ever, while US stocks fell into the abyss? I’ll admit, the chart doesn’t seem to illustrate any correlation.
But, what if you took the same data, and multiplied the daily percentage return of the dollar index by -3? The chart would look like this:
Still think there’s no connection?
The Forex makes about as much sense to me as pro wrestling. In abstract, I’d think that revaluations of one currency against another would move at a glacial pace. Currencies re-valued every nano-second 120 hours a week just doesn’t seem right (and neither does scantily clad men who take steroids so they can wear makeup and engage in mock violence with each other), but here we are….Perhaps the main difference is you don’t find many people stupid enough to bet on pro wrestling. Well, that and the perils of Triple H don’t affect my 401(k) (at least as far as I know……).
Still, I find it all so very strange…..
March 9 – May 1, 2009
We’ve rallied 30% from the March lows, while my beloved US Dollar has slid 5.5%. You may think this would indicate an inverse 3 to 1 relationship between the USD and US stocks is no longer valid, but again a chart may indicate otherwise:
Certainly, this weird synergy between the dollar and stocks is not as tight as it was in the fall, but one could argue that the dollar’s 4.37% slide in just two days (March 18-19) was a key component in sustaining the stock rally.
A Little Background….
This little theory of mine has been a long time in the making. I am presenting it because I’ve been noticing a trend. Whenever it has appears that this rally is about to fade, go and get a one-minute chart of the dollar index (I like this one from Quote.com). Stock market turnarounds have invariably coincided with sharp drops in the dollar intraday and I think it is clear that the currency is the dominant factor int the relationship.
The longest chart I can prepare for you illustrating the S & P 500 vs. the 3x dollar inverse begins March 01, 2007 and looks like this:
Like it or not, a strong dollar is probably your portfolio’s worst enemy, but governments issuing gazillions in new debt can ill-afford a weak currency. Perhaps that explains why our currency rallied like never before last fall, in the midst of a string of taxpayer bailouts and interventions only Zimbabwe could be proud of. At least for the moment, The US dollar and US stocks seem inextricably linked in a bizarre push-me-pull-you dance and things might get really ugly when the music stops.
The 3 times inverse relationship that seems to exist between the dollar and stocks makes me uncomfortable because I can’t explain or even rationalize it, yet I think it would be a big mistake to ignore it.