That Dollar, Stock Market Relationship

Some pundits have noted in recent days that there has been a strong negative relationship between the dollar and the U.S. stock market. That was certainly true late last week when the 5-day average correlation of the U.S. Dollar Index and the S&P 500 stood at -.71 at week's end, July 15. (Many look at correlations of .7 and above or -.7 and below as indicators of a strong positive or negative relationship). So, if you believe that current relationship will continue to hold, whither the U.S. Dollar Index?

Using our Markov tool in Excalibur Pro, it is looking like the dollar is about to settle into a "steady as she goes" or "slightly weaker" mode. As you can see from our Markov chart, when the U.S. Dollar Index State 2 crosses above State 1 for a sustained period, the index moves higher at a more rapid pace. When State 1 crosses above State 2, things tend to moderate. As you can see from the chart, the states are converging.

Another interesting note. According to our correlation data, there have been only four days in the past six months (130 days) that there has been a strong positive relationship (5-day correlation average above .7) between the U.S. Dollar Index and the S&P 500. That compares with 27 days in the past six months that there has been a strong negative relationship (5-day correlation average below -.7). Looked at another way, that positive correlation relationship exists about every six weeks; the negative a little less than once a week.