Is the Dollar Index vs. Equity Market Correlation Breaking?
I have every expectation that the broader stock indexes are headed for significant losses this week. Many charts are pointing only down from here. The most bullish case, from a technical perspective, suggests at the very least that the markets will strongly correct.
What's interesting about this is the apparent divergence between what the stock indices are telling us and what the dollar index seems to be telling us.
In a strong equity market drawdown, I would expect the dollar index to strengthen significantly. But I am having a hard time viewing this chart as doing anything but form a bear flag right now.
So, if the strong dollar/weak equity market correlation is to hold, then there is a contradiction in the charts: equity markets look to want to go lower, but so does the dollar. Or, is that correlation about to break? Will the equity markets drop with the dollar dropping?
As a matter of fact, we happen to have a very recent example of just this very thing happening. In the first "crash," the dollar behaved in two diametrically opposed ways. From February 20th to March 8th, the dollar plunged with equities plunging. And then from February 9th to the end of the crash, the dollar soared while equities continued to plunge.
We may be about to see a repeat of that same pattern again.
What's interesting about this is the apparent divergence between what the stock indices are telling us and what the dollar index seems to be telling us.
In a strong equity market drawdown, I would expect the dollar index to strengthen significantly. But I am having a hard time viewing this chart as doing anything but form a bear flag right now.
So, if the strong dollar/weak equity market correlation is to hold, then there is a contradiction in the charts: equity markets look to want to go lower, but so does the dollar. Or, is that correlation about to break? Will the equity markets drop with the dollar dropping?
As a matter of fact, we happen to have a very recent example of just this very thing happening. In the first "crash," the dollar behaved in two diametrically opposed ways. From February 20th to March 8th, the dollar plunged with equities plunging. And then from February 9th to the end of the crash, the dollar soared while equities continued to plunge.
We may be about to see a repeat of that same pattern again.
Comment:
Here is a line chart showing how the ES futures and Dollar Index behaved during the February and March Crash, first by being positively correlated, then inversely so:
