Fast Dollar Move Implies Stock Market Risk

| About: SPDR S&P (SPY)

Summary

We take a walk through recent history to see if fast dollar moves can predict market moves.

We found that most times that the dollar jumped without a simultaneous market hit, the market slide was soon to follow.

The move makes sense because a rush for dollars is an early sign investors are running for cover.

We review if the fast dollar (NYSEARCA:UUP) move can mean anything for stock moves (NYSEARCA:SPY) to come. It appears that if the dollar jump did not coincide with a market drop, a market decline was soon to follow. Some of those declines were meaningful.

Let's review recent history.

Frankly we're all "beared up," so we may be a little biased. That said, we'll walk you through what we see and our thinking so you can make your own judgment.

Here's a chart of the euro versus the dollar (red and green) (NYSEARCA:FXE) versus the SPY (blue).

Click to enlarge

Source: Interactive Brokers.

On the bottom of this chart is the euro versus the dollar. Because euro is the numerator, a down move implies dollar strength. We picked spots on the lower chart that resembled the recent move of the dollar (all the way on the right of the chart).

When the euro moved .050 in about two weeks, we tried to capture it with the vertical lines and see what the blue line, the S&P 500 ETF did thereafter. At first glance, the SPY move looks about 50-50. Sometimes up sometimes down. (You ain't got nothin', Elazar!)

At second glance, if the dollar jump was not because of a down move in stocks, a down move soon followed. Most of the times, the market drop caused the dollar jump and then the market rallied. After it was down, it bounced. That's basic and makes sense. Now for what we see. But any time the market wasn't the cause for the dollar jump meaning the market held up while the dollar jumped, the market soon dropped.

Simply, if the market held up after a "fast dollar move," the market soon dropped - sometimes big. See for yourself.

You see above that any time the market went down coincidentally with the dollar jump, the market bounced. If not the market soon dropped.

That's where we are today.

The Dollar Is Hinting To Market Risk

Why in the world would the dollar be hinting to market risk? The dollar is a safe haven maybe more so than ever. Foreign investors see the US bond rout and they see inflation. If inflation picks up globally which we think it is, central banks need to pull back.

If they pull back, there is no support for bond markets (TLT, AGG). Bond markets have been the support for stock markets because of equity's lack of earnings. When that bond-rug is pulled out from under stocks, equities have a relative valuation issue.

No earnings growth and better yields in bonds now causes investors to switch back to bonds. And then there goes stocks.

So we'd guess investors are getting to cash and foreign investors are getting in safe-haven cash which is perceived to be the dollar.

Fed Chair Yellen confirmed that the bond market made the right trade by selling off. That is worrying bond investors and should worry stock investors.

If the leader of the free world - the Fed Chair - says bond investors' panic selling was the correct move, we need to all take note. The dollar move now is not like the VIX (NYSEARCA:VXX) (NASDAQ:XIV) that sees traders hedge with options or trade volatility. The dollar represents global flows of actual cash. Globally investors are "showing their cards" which way they want to go.

As long as the market holds up, they don't need to panic and potentially miss performance by not being invested. But by buying dollars, they show you their "finger is on the trigger." Once investors see the market begin to drop and have that "I knew it" moment, then they pile on. Then they'll flood to get out of the rest of their positions. That's why the fast dollar move can be an early hint to a bigger move to come.

Conclusion

We're "all beared up."

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.