With stocks and the dollar on a see-saw, there are only three possibilities to choose from.
Since the stock market is in the news (perhaps as a result of trillions of dollars/euros/yen/yuan/quatloos having suddenly vanished from millions of accounts), it seems timely to examine the key correlation between stocks and the U.S. dollar. As I have often noted here, this “big picture” correlation is a simple see-saw: when the dollar is scraping bottom, stocks are at their highs, and when the dollar is up then stocks are tanking.
At the risk of alienating chart-averse readers, I’ve marked up the charts of the S&P 500 (SPX) and the U.S. dollar index (DXY).
For those who aren’t going to look at the charts, what they suggest is that there are really only three possibilities in play:
A. Stocks go up and the dollar drops to new lows
B. Stocks fall and the dollar rises significantly, a pattern that has repeated several times since 2007
C. The see-saw breaks and stocks and the USD rise or fall together.
The key to the relationship between stock valuations and the dollar is corporate profits. When the dollar declines, then U.S. global corporations’ overseas earnings–now roughly 60% of total profits for many big global corporations–expand as if by magic when stated in dollars.
We may be skating on very thin ice here, but the weight of the evidence still supports a weak bull case for the near to intermediate term. So I’m adding buy picks on the chart pick list and adjusting trailing stops to account for the risk.
These reports are not investment advice. They are for informational purposes, for a broad audience of investment and trading professionals, and other experienced investors and traders. Chart pick performance changes week to week and past performance may not indicate future results, as you know. Trading involves risk, and these reports assume that you understand those risks and manage them according to your tolerance.