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Just for a unique perspective, I thought I would look at the SPX per DXY "ratio," a feature which Trading View allows you to easily do. In this chart, the SPX is the numerator, and the DXY is the denominator.
The way this works is as follows: if the SPX remains the same but the DXY falls, this ratio, or what you see on the chart will increase, as well as every other combination you can perform with a fraction as well. Now, it is often the case that the DXY and SPX (and other US equity measures) are inversely correlated. Under normal conditions, if the dollar index falls, US equities tend to rally (there are exceptions, but lately they have been correlated). Likewise, if the dollar index rallies, US equities can suffer.
Thus, this chart allows us to see "how much" of the SPX rally can be attributed to the dollar index's recent weakness. In "dollar index terms," as a matter of fact, the SPX is now at all time highs.
Furthermore, since the SPX , in its "own terms," is not at all time highs, we can deduce that much of this rally, especially over the last month, can be attributed to the dollar index's weakness. And finally, a strengthening of the dollar index should have a strongly negative affect on the SPX .
The way this works is as follows: if the SPX remains the same but the DXY falls, this ratio, or what you see on the chart will increase, as well as every other combination you can perform with a fraction as well. Now, it is often the case that the DXY and SPX (and other US equity measures) are inversely correlated. Under normal conditions, if the dollar index falls, US equities tend to rally (there are exceptions, but lately they have been correlated). Likewise, if the dollar index rallies, US equities can suffer.
Thus, this chart allows us to see "how much" of the SPX rally can be attributed to the dollar index's recent weakness. In "dollar index terms," as a matter of fact, the SPX is now at all time highs.
Furthermore, since the SPX , in its "own terms," is not at all time highs, we can deduce that much of this rally, especially over the last month, can be attributed to the dollar index's weakness. And finally, a strengthening of the dollar index should have a strongly negative affect on the SPX .
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Other examples include crazy scenarios such as: if the SPX falls, but the DXY falls by more than the SPX falls, this chart will nevertheless continue its march up.
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And finally, another way to use this ratio is to compare it to the SPX itself. When they diverge, you can attribute that divergence to the DXY. So for instance, since the June high, the SPX has not rallied nearly as hard as the SPX/DXY ratio has, which offers us a clue as to the extent to which the last weeks have been all about the dollar.
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I think you better multiply by DXY/100 ... it will give you the relative view for people outside of the US:
For Example here is my view from EU, basically the SPX in EUR:
Since 1st of Jan, I am better off just holding EUR on a saving account rather than holding SPX
For Example here is my view from EU, basically the SPX in EUR:
Since 1st of Jan, I am better off just holding EUR on a saving account rather than holding SPX
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As you mention it is a dollar induce rally as in reality the value adjusted rally. should the dollar index stayed at 100, it would not have been attractive for people to buy in.
Institutions around the world will face a dilema: 1/ either they believe in a sharp reversal of the dxy/ eurusd along with a stock rally and they will tend to buy more (but as you said if dxy goes sharp up it usually means that the market is risk-off thus going down) 2/ or they are short dxy and they should better sell to buy EUR assets (E&B) / other safe haven asset or simply EUR.
Institutions around the world will face a dilema: 1/ either they believe in a sharp reversal of the dxy/ eurusd along with a stock rally and they will tend to buy more (but as you said if dxy goes sharp up it usually means that the market is risk-off thus going down) 2/ or they are short dxy and they should better sell to buy EUR assets (E&B) / other safe haven asset or simply EUR.
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I shorted right where the divergence started haha, could explain my Zombie Bull and Market Gravity theories. This artificial price inflation doesn’t have the power of actual fundamentaL based price driving.
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@ProfitHarvest, Indeed. But don't worry, that dollar bounce is coming to our rescue! :)
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All great points. But at this point, it might actually be a better risk/reward ratio to short EUR/USD rather than just hold EUR
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@horacejunior, except if there is a sudden short squeeze on the USD which would prop it up...
likely if there is no deal quickly on the stimulus package. this would be good for the USD as investors should be reassured that the US can pay off it's debt if they stop wasting money
likely if there is no deal quickly on the stimulus package. this would be good for the USD as investors should be reassured that the US can pay off it's debt if they stop wasting money
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