SPX & U.S. Dollar divergance
- Thread starter indahook
- Start date
I've never read the Murphy book but I am not a big fan of his in any case. I think intermarket analysis is one of those ideas that sounds good in theory but doesn't pan out in practice. Of course, some markets have stable relationships, eg, interest rates and housing. For the most part though, such relationships either have varying lags, making them untradeable, or totally change over time. The dollar/stock market relationship is a good example.
For decades, there was no real correlation between currencies and the market. Often there was an inverse relationship, as in '87 when stocks rose all year against a falling dollar. In fact, Tony Dwyer has a post in minyanville.com today that basically says the last four times the dollar dropped 20%, the market rallied but this time it has fallen. The bubble market sucked in a lot of foreign money and gave us the appearance of a positive correlation between the dollar and stocks, although it is not holding up today.
For decades, there was no real correlation between currencies and the market. Often there was an inverse relationship, as in '87 when stocks rose all year against a falling dollar. In fact, Tony Dwyer has a post in minyanville.com today that basically says the last four times the dollar dropped 20%, the market rallied but this time it has fallen. The bubble market sucked in a lot of foreign money and gave us the appearance of a positive correlation between the dollar and stocks, although it is not holding up today.
this is part of what makes me believe that this rally is going to get killed. it seems that the tax cut and "the bottom" have already been priced in, and while we'll probably keep going up for a bit, those frantic bits of selling and poor underlying economic data doesn't jive with the market's uptrend.
Sometime this is true, but for stock this is not true because investors have a double exposure, the underlying stock risk and the currency risk. For the market the best situation for investor is to have a stable currency, for for stranger if the stock up and the US currency go down, this is not interesting for him, and the result is the money will pull out of the market after sometimes ...
This situation could be go down the US market if the differential between currency trend and and stock trend don't have the same direction, not a good new for the market IMO. Already, some investor have taken their money and go out, but this could be a process that could be accelerate in few time. I know many investor that want to retired their money from the US market and I think they are not alone.
To me the S&P may not be the best perspective to view the USD from. As a currency with safehaven status, the best equity market of the 90's and a great bond rally over the last 8 yrs. That was likely the time to do some serious correlation analysis between equities & the currency.
Today however, there is far more interest and capitilization in the bond market. I recently jotted down a statistic that 30% of the Tsy. market is held by Asian central banks alone. I haven't checked whether that's accurate or not but it is an example how the USD has bigger influences than equities.
Suppose your a foreign bondholder and the currency just fell 15+% over the last 12 months? What's your opinion on the USD? The flow of funds over the last 12 months shows inflow trends have reveresed in equities and greatly slowed with bonds and I don't recall what the USD positions were but it wasn't wildly bullish that's for sure.
My point is when the market was hot that was the time to pull out the USD/equity correlation studies IMHO. Today requires a different approach. To a foreign fund manager or investor there is no way he's going to overweight the US equity markets. So the inflows have to come from trade, bond markets, or safe haven buyers or sellers. There's where I would start modelling and should some other issue raise it's head then it would need to be worked in as well.
Today however, there is far more interest and capitilization in the bond market. I recently jotted down a statistic that 30% of the Tsy. market is held by Asian central banks alone. I haven't checked whether that's accurate or not but it is an example how the USD has bigger influences than equities.
Suppose your a foreign bondholder and the currency just fell 15+% over the last 12 months? What's your opinion on the USD? The flow of funds over the last 12 months shows inflow trends have reveresed in equities and greatly slowed with bonds and I don't recall what the USD positions were but it wasn't wildly bullish that's for sure.
My point is when the market was hot that was the time to pull out the USD/equity correlation studies IMHO. Today requires a different approach. To a foreign fund manager or investor there is no way he's going to overweight the US equity markets. So the inflows have to come from trade, bond markets, or safe haven buyers or sellers. There's where I would start modelling and should some other issue raise it's head then it would need to be worked in as well.
I definately appreciate another perspective, however I think you missed the point(s) of the post. Which is the equity market cannot keep going up as the dollar goes down...impossible..point blank. Thats not to say that the dollar wont have a bear mkt rally or flatten out which could extend the equity mkts rally. Secondly,whenever you have a divergance such as this something major is afoot. So what is it? Wish I knew, but its when I start to speculate on future direction I get smoked so i`ll leave it up to the educated traders....or maybe you got the point of the post so much that your reponse was to far over my head
C.
a falling usd is big time trouble for europe. they already mostly have socialist uncompetitive governments. a strong euro means they wont be able to export competitively and in the long term means social unrest and probably an even deeper recession for them.
anti us sentiment in europe is cutting their own throat in the long term.
anti us sentiment in europe is cutting their own throat in the long term.