As you all know, there has been a tight correlation between the US Dollar Index and equities for the better part of 9 months. If the Dollar goes down, then equities go up. Even if there is a hint that the Dollar might go down - let's say, a bad employment report suggesting that the Fed will keep its foot on the monetary pedal even longer- stocks go up. We all have the drill down. The Fed throws us a biscuit, and we all stand up and bark!

Since the Dollar has started to show signs of reversing its down trend, several market commentators have remarked that how resilient stocks have been in the face of a rising Dollar, and some have suggested that the correlation between the Dollar and equities has been broken.

I say not so fast. See figure 1 a 60 minute bar chart comparing the Power Shares QQQ Trust Series (symbol: QQQQ) in the upper panel with the Power Shares DB US Dollar Bull (symbol: UUP) in the lower panel. Going back to mid - October, the correlation is pretty easy to see - Dollar down, stocks up. Starting in December, the Dollar broke its down trend (gray oval on chart), and stocks went sideways. This is a plus for stocks as the Dollar was up and stocks held their ground.

Figure 1. QQQQ v. UUP/ 60 minute

Now look to the upper right on the chart. These gray rectangles depict the last two weeks of trading. The relationship of Dollar down and stocks up still appears to be holding true to form as the Dollar is at the lower end of its range and stocks are at the upper end.

I see no evidence that the correlation between the Dollar and stocks has been broken. Although it is all stocks all the time for most people, it is no secret that I am not buying the hype of this rally although I do have exposure to various sectors that I have mentioned in this blog including regional banks, utilities, housing, Japan, and Canada. With shares so overbought and sentiment overdone and headwinds mounting, there are heightened risks although most investors believe that the government and Federal reserve have back stopped the market and taken risk out of the equation. Nonetheless, there is good reason to believe (and I have to yet to present the data) that the Dollar could rise, and as this correlation between stocks and the Dollar still exists, this would pressure equities.

Regardless what you think, this relationship between the Dollar and equities bears watching.

By Guy Lerner

http://thetechnicaltakedotcom.blogspot.com/

Guy M. Lerner, MD is the founder of ARL Advisers, LLC and managing partner of ARL Investment Partners, L.P. Dr. Lerner utilizes a research driven approach to determine those factors which lead to sustainable moves in the markets. He has developed many proprietary tools and trading models in his quest to outperform. Over the past four years, Lerner has shared his innovative approach with the readers of RealMoney.com and TheStreet.com as a featured columnist. He has been a regular guest on the Money Man Radio Show, DEX-TV, routinely published in the some of the most widely-read financial publications and has been a marquee speaker at financial seminars around the world.

© 2010 Copyright Guy Lerner - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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