Inverse Correlation of Stocks vs. Dollar at a Glance

We've been talking about this for months... effectively all the stock market (commodities as well) has become is "do the opposite of the dollar". Dollar sinks = buy anything (almost daily)... and vice versa (rarely). It doesn't work every day, but if something works 80% of the time in markets, it's akin to a gold mine. [Jun 30, 2009: Bloomberg - Correlation Among Asset Classes Highest Ever]

Courtesy of Clusterstock we have a chart to show this inverse correlation - the time line is relatively short, but you can see (if you are an American reader) as your purchasing power goes down, your stocks go up... you really don't win in real terms, but since most Americans only live in a nominal world they feel better about what is going on in the country. There is a silver lining to having a complete lack of financial education in our public school system (by design?)... it's much easier to deceive the masses on what "prosperity" is.

As one of our readers has been pointing out the past 48 hours in the comments section of our posts - now that we've "restretched" the rubber band back to the complete inverse of where it was nearly half a year ago, it will be interesting to see if we "snap back" ... or if the Federal Reserve has the power to completely break the rubber band.

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Meanwhile, David Malpass tries to explain to those who cheer the dollar's demise as "helpful" to the US economy in the near term that this thinking is akin to all that dominates American solutions nowadays ... kick the can. Worry about the fire in the couch you are sitting on while ignoring the minor issue that the entire house is burning down. Forest. Trees.

Comments

[thinkb4uwrite:]

Thanks trader Mark for the reminder that most of us Americans are trapped on this sinking ship that has often been likened to the Titanoc and moving up the decks now away from the water believeing we will somehow be safe. The Carpathia will not arrive until the sinking is over and most of us have drowned in the sea.

Recall the Titanic's lifeboats made a place for many privileged and wealthy passengers... the very way it will likely pan out when the sinking of our country is also finally over.

Oct 16 02:46 PM

[tivoboy:]

it won't "snap back" before late tuesday or early wednesday. We need to sell more treasuries next week, and the lower the $$, the more treasury demand there is!! Mark my words, dollar lower monday and tuesday next week

Oct 16 03:16 PM

[Shocksink:]

I might be an ass or something...but I think that the dollar defaulting is the only way to prosper sooner. With gigantic amount of debt, maybe 80 trillions of total debt, the US will never be able to honor anything within 100 years. So if the debt is wiped out with the debasing of the dollar, it will be much easier to start from scratch. Of course there will be millions and millions of casualties in the process.

Oct 16 04:16 PM

[Ricard:]

"There is a silver lining to having a complete lack of financial education in our public school system (by design?)... it's much easier to deceive the masses on what "prosperity" is."

Even better, why not encourage a disdain for education in general? The dumber our populace is, the more they will be dependent upon the intelligentsia/elite, and the more they will willingly pay handsomely for 'smart' advice.

Regarding your rubber band analogy, I think the Fed hasn't even begun to stretch it...:)

Oct 16 07:34 PM

[GreenMom:]

Last two Treasury auctions that the Fed will participate in are Oct 21 and 28, right? If there is not enough interest in the November auctions, then what? What if foreign banks continue to buy the dollar to weaken their own currencies, as investors start backing away from Treasury auctions? I'm particularly interested in what these dynamics could do to the US stock market... I notice that market sells off like crazy when dollar strengthens -- is this ETF driven?

many thanks for all insights.

Oct 16 07:57 PM

[Dave Wrixon:]

All this shows is that US Corporations are no longer really priced in Dollars. They are effectively being priced in a basket of currency and when that price is converted back to dollars, it reflects the current market valuation of the dollar.

Not Rocket Science, is it?

Oct 17 03:54 AM

[Michael Clark:]

It would be nice to see a longer-term chart. I think it would show that real Bull Markets show an accompanied ascendancy of both the Dollar and stock prices. Bear Market rallies might show a weak dollar accompanied by higher stock prices. This is an intuition -- and I've searched for the chart I'd like to have -- but I haven't found it.

I always remember the dollar up-stocks up explanation for rallies. Now, a weak dollar is good for stocks. A weak dollar is good for stock rallies so that we really don't make any money on the stock rallies but we feel better.

Oct 17 06:00 AM

[Stephen Kanitz:]

"but since most Americans only live in a nominal world"

Finally someone had the courage to say it. That means profits are overvalued, equity and assets are understated, return on investment and equity overstated.

This whole crisis is a nominal mistake. Lehman's net equity and retained earnings were stated in 1933 dolars to 2007 dollars without adjusting to 50 years of inflation. Loans outstanding were in 2008 real dollars. Highly leveraged ? No way, just divide by the real net equity and you get a different figure, But not if you live in a Nominal world.
Read the blog Real Economics
economics.melhores.com...

Oct 17 08:34 AM

[fotokemist:]

Michael Clark asks about a longer term chart. You can use the free charts at stockcharts.com for a three year lookback. If you enter $USD:$SPX (ratio of dollar index divided by SP500 closing) in the symbol field and select 3 years for the range, you will see that the ratio reached a minimum of ~ 0.050 in early Nov 2007 and peaked at a value of ~ 0.130 in early March 2009.

Other than volatility, the $USD:$SPX ratio chart is very similar to the simple $USD chart over the past three years. So, are we all effectively FX traders?

Oct 17 12:34 PM

[j-dub:]

Listen here Trader Mark- like it or not, the dow is at 10k so I'm throwing an economic recovery party and you sir, are invited!!!!

If there is any other economic indicator that I or anyone else needs to know about, I'm sure the government will send out e-mails.

Sure I still wish I had had a job, a possibility of finding a new one, or that the price of Ramen noodles or cereal wasn't so darn expensive, BUT NO ONE GETS EVERYTHING THEY WANT.

At least the Dow is at 10k!!!!!!!! (flutes clanking)

Oct 17 06:41 PM

[Albertarocks:]

On Oct 17 06:00 AM Michael Clark wrote:

> It would be nice to see a longer-term chart. I think it would show
> that real Bull Markets show an accompanied ascendancy of both the
> Dollar and stock prices. Bear Market rallies might show a weak dollar
> accompanied by higher stock prices. This is an intuition -- and
> I've searched for the chart I'd like to have -- but I haven't found
> it.

Michael, I think I can put together the chart you want to see and post a link to it here. What time frame would you like? Daily? Weekly? I tried to to this for you in a different thread, but unknown to me was that it was during a short period of a few days when embedded links weren't working on SA. I'll try it again if you're interested.

Oct 17 10:45 PM

[Albertarocks:]

For anyone else who wants to see a long time frame for the chart in this article, I'll post a like to one here and see if it works. One time it did work and another time it didn't. Here goes:

21 year span of weekly data $SPX vs. $USD:
stockcharts.com/h-sc/u...


21 year span of weekly data $SPX vs. $TNX (treasury yields):
stockcharts.com/h-sc/u...

Oct 17 10:59 PM

[bartpr:]

the dollar will not recover until capital outflows stop and reverse. with our continued demand for borrowing and flooding the market with dollars dont expect a recovery soon.

Oct 18 09:38 AM

[untrusting ...:]

Ok, good charts. Thanks for posting it.

So basically the inverse correlation of the US market to the dollar started in about 2003. Prior to that it was basically a flat or positive correlation.

Not sure why that is, but perhaps that is an approximate time frame for when US debt, private and government, began to really spiral out of control.


On Oct 17 10:59 PM Albertarocks wrote:

> For anyone else who wants to see a long time frame for the chart
> in this article, I'll post a like to one here and see if it works.
> One time it did work and another time it didn't. Here goes:
>
> 21 year span of weekly data $SPX vs. $USD:
> stockcharts.com/h-sc/u...;p=W&yr=20&...
>
>
>
> 21 year span of weekly data $SPX vs. $TNX (treasury yields):
> stockcharts.com/h-sc/u...;p=W&yr=20&...

Oct 18 02:45 PM

[Albertarocks:]

On Oct 18 02:45 PM untrusting investor wrote:

> Ok, good charts. Thanks for posting it.<

My pleasure!


> So basically the inverse correlation of the US market to the dollar started in about 2003. Prior to that it was basically a flat or positive correlation.<

Yeah! There was a real secular change in that relationship ($SPX vs. $USD) in 2003. Something obviously changed big time.

> Not sure why that is, but perhaps that is an approximate time frame for when US debt, private and government, began to really spiral out of control.<

I think you're probably on the right track. I honestly don't know. Michael Clark was asking for a chart like this and I think he has a pretty good idea about it. I hope he comes back here and let's us know what he sees, or what his theory or explanation is.

Personally, I suspect that this chart is telling us that the real top in the secular bull market for stocks was 2000, not 2007 as is the widely held belief. In a bull market, stocks and the USD could go the same direction at the same time. I think something fundamentally changed in 2003 that may not reverse for another decade. I don't think this chart is necessarily predictive about market directions, other than it suggests that if the dollar rallies, the stock market will tank, and vice versa. I'm not sure if we can infer when or if that's going to happen. I guess the main thing I'm seeing here is that if the FED dares to support the dollar, this stock market takes a swan dive... immediately.

Oct 18 09:24 PM

[Swashbuckler:]

Thanks for the charts Albertarocks. Apparently Michael Clark's opinion is on the money. The USD and the stock market have only been inversely correlated for the past 6 years. Prior to that, they were typically positively correlated. Kind of hard to know if or when the relationship now existing between the two reverts back to earlier status. I would keep an eye on it, but not regard it as infallible.

Oct 18 09:57 PM

[Swashbuckler:]

I see I just repeated untrusting's observation. Oh well.

Oct 18 09:59 PM