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The Dollar / Equities Correlation

The ever insightful Jeff Miller has raised the question of the U.S. Dollar / equities correlation. Very timely; readers know I have been looking at the Dollar as a signal for trading other asset classes, and posted my own brief visual study of the Dollar / equities relationship a couple of weeks ago. More recently, however, I have been wondering whether this tight correlation might be ending soon.

One of the reasons for anticipating a breakdown of the inverse correlation is the possibility of rotation out of bonds and/or commodities and into stocks. The bond rally shows clear signs of exhaustion and, judging by the action in TIPs and conventional Treasuries and durations coming in, it appears the fixed income market is positioning itself for inflation. Bonds had been priced for a scenario that doesn't seem to be playing out in the real economy, apart from the ongoing troubles in real estate.

Here the usual data points will come into play: watch ICI flow of funds, price and volume action in the various asset classes, etc. My trader's instinct tells my this is a growing possibility, but we need data to signal trades. It's not there yet, but this is something to watch for.

Disclosure: Author is Long TBT and various equities