In this week’s Barron’s Michael Santoli mentioned that the dollar is driving the market. His claim is that the market rises when the dollar falls. I don’t see what the mechanism is, but first let’s see if we should even try to look for one.
SPY / 4 vs UDN
Here we are looking at the ETF that tracks the S&P 500, SPY, divided by four to make it comparable to UDN. UDN is the ETF that is inverse to the dollar index. From the creation of UDN, its correlation with SPY is 24% which is significant.
The next chart looks at the same two ETFs over the last year.
SPY / 4 and UDN 6/2008-8/2009
The correlation has increased to 31% for the period shown from 6/2/2008 to yesterday. The interesting thing is that in the 163 trading days in 2009, during 114 of them, UDN and SPY were in the same direction, while 46 of them they went in opposite directions. (Three of them, UDN had no change.)
So it would be interesting to see if we can predict the direction of the market by looking at the overnight movement of the dollar.
Stay tuned!
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