Mike Kane's  Instablog

Forget corporate profits, GDP, unemployment, consumer confidence. You want to know what has been driving the market over the last few months, look no further than your wallet. It's All About the Benjamins baby. These days I tend to only check one number when I wake up in the morning- the U.S. Dollar Index. If it is up, the market is probably down, and visa-versa.

Most people would assume that a stronger dollar means a stronger stock market, but this is not really the case. A weaker dollar makes multinational companies more money, and it pushes up commodities prices. Commodities related stocks- oil, agriculture, metals- make up a large portion of world stock markets and drive market sentiment much like financials.

I charted the correlation between the Powershares DB US Dollar Index Bearish ETF (UDN) and the S&P 500, Dow Jones-AIG Commodity Index, Gold, and Silver. From UDN's inception in 2007 until the end of 2008, it had a .12 correlation to the S&P 500. Over the past year, this has ballooned up to .54, and over the last month it is near .72! The numbers for Commodities, Gold, and Silver have stayed fairly consistent (around .5-.75), which tells me one thing.

As long as equity prices only rise when the dollar falls we are in deep trouble. An equity market inflated by a depreciating currency is nothing more than a mirage.  On paper your stocks go up in "price", but in reality they are actually losing money.

Will the dollar trend reverse itself, as Jim Rogers suggested this week (for the record Jim, like me, is very bearish on the dollar in the long term)? It probably will. If you have a large U.S. Equity position I would suggest some type of dollar hedge, in the form of futures/options for those who are sophisticated, or more simply a position in a fund such as UUP (Powershares DB US Dollar Index Bullish). This fund has about 11% volatility, versus 27% for SH (Proshares Short S&P 500 Fund), which would be a more risky option as a equity hedge.

Will it be "Mo Money More Problems" for the long term? I believe it will be, and that is what is so scary about this market.

Disclosure: No Positions