The U.S. Dollar vs. Capital Markets

The Inverse Correlation Explained:

In the recent past, there has been an inverse correlation between the U.S. dollar and dollar denominated assets (mainly stocks and commodities). By definition, the inverse correlation states that stocks and commodities (which are priced in dollars) will fall when the dollar rallies. Since early December, the greenback has steadily rallied which has put pressure on several capital markets. As the following few charts show, on a relative basis, crude oil is the hardest hit, followed by gold, then U.S. equities. What does this mean? We’ll let you draw your own conclusions by commenting below. If you want our thoughts, contact us here:
*Note: All data based on Thursday, December 17, 2009’s close.

Stocks & Commodities Rally; Dollar Falls

Stocks and Commodities Rally; Dollar Falls

The major averages rallied smartly on Monday which sent the benchmark S&P 500 Index above resistance and to a fresh 2009 high! Volume, a critical component of institutional demand, was higher than Friday’s levels on both major exchanges; which signaled large institutions were accumulating stocks. Advancers trumped decliners by over a 4-to-1 ratio on the NYSE and by over a 3-to-1 ratio on the Nasdaq exchange. It was encouraging to see new 52-week highs outnumber new 52-week lows on the NYSE and Nasdaq exchange.

Asia Continues To Help!

Stocks rallied across the globe as the US dollar fell after Asian governments reaffirmed their economic stimulus packages. The 21-member Asia-Pacific Economic Cooperation group, which currently comprises over half of the global economy (approximately +54%), announced that they will maintain their massive economic stimulus packages well into 2010. The greenback fell to a fresh 15-month low which sent a host of dollar denominated assets higher: mainly stocks and commodities. The Dollar Index, which measures how the dollar performs against six other currencies, fell to 74.820 and touched 74.679 which was the lowest level since August 2008. The Reuters/Jefferies CRB Index of 19 raw materials jumped  2.9% which was its largest single day advance since August! The weaker dollar helped send gold to another record high which lifted a slew of gold stocks in its wake.

Economic News:

Turning to the economic front, the US government said retail sales grew +1.4% in October.  A slew of retailers jumped on the news as investors bet the forthcoming holiday season will top estimates. Several of the country’s largest credit card issuers rallied after reporting charge backs (i.e. bad loans) fell for a sixth straight month. American Express Co. (AXP) jumped to a fresh 2009 high as volume swelled. This was another stronger-than-expected economic data point which suggests the economic recovery is in full force. Elsewhere, Federal Reserve Chairman Ben Bernanke gave a speech to the Economic Club in New York and said economic “headwinds” remain in the economy. He also said that, “Significant economic challenges remain… The flow of credit remains constrained, economic activity weak and unemployment much too high. Future setbacks are possible.” He also noted that we are in a much better place in Q4 2009 vs Q4 2008.  It is important to note that the S&P 500 has rebounded +64% from its 12-year low in March which is a very impressive feat! Turning to the market, leadership remains very thin which only reiterates Jesse Livermore’s advice; Follow The Leaders!