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By Bryan McCormick

The dollar and bonds have been heavily affected by the Fed's quantitative-easing program. The impact began this summer, well ahead of the event itself, and the dollar has been creeping toward its crisis-level lows since then.

I became curious about how much of the rally since the summer has been caused by the declining value of the dollar. The results were rather surprising and suggest some steps that traders may want to take in evaluating candidates for investments, especially for longer-term positions. More on that after we look at today's charts.

Our first chart shows the very simplest story of the dollar and an asset class. We are looking here at the US Dollar Index and the price of gold. I have set up the charts on a returns basis, using the dollar's June 7 high as a starting point. The SPDR Gold Shares (NYSEARCA:GLD) exchange-traded fund serves as a proxy for gold itself.

GLD / Dollar

(Click to enlarge)

As we can see in the red bars, the dollar has declined 14 percent since its peak in June. The GLD, in yellow, has risen by 13.7 percent over the same period.

This won't come as much of a surprise, as we know that gold and the dollar have an inverse relationship. Being long gold is in some respects is a way of being short the dollar, and in this case that would be literally true on a returns basis.

SPX / Dollar

(Click to enlarge)

I then put up the same comparison with the S&P 500, shown in green above, and I must say the result was a bit of a shock because I had expected the S&P to have outperformed.

The inverse relationship has actually been perfect, as we can see, but that essentially means that it's been a wash for the S&P on a real-returns basis because its stock components are priced in dollars.

So being long the S&P 500 has in effect been a proxy for being short the dollar or being long gold. If people have thought of gold as a hedge or the S&P as a better investment vehicle, that has not been the case since June of this year.

NDX/Dollar

(Click to enlarge)

So what has outperformed the dollar trade? It's also not likely to be a surprise that technology has outperformed. When we put up the Nasdaq 100, in purple, we can see that tech has outperformed even on a broad index basis. If we were looking at names, such as Apple (NASDAQ:AAPL), those have performed even better. In commodities, agriculture has been the standout.

In terms of truly being ahead of the decline in the dollar, which is to say being concerned with real returns, filtering our investment or trading vehicles against the dollar can be a valuable way of measuring relative performance. If what we have chosen to trade or invest in follows an inverse relationship to the dollar too closely, we are really making the same trade--even though we may not be aware of that.

In that case, our total portfolio may be overly correlated to the dollar. That would leave a portfolio vulnerable to dollar shocks in either direction.

By filtering our trading or investment vehicle against the dollar, we can avoid that problem.

Disclosure: No positions

Source: Have All Trades Been Short the Dollar?