On Wednesday, I wrote about the troubling signal given by the Volatility Index (VIX) as it surged in a manner which resembled the 2008 crash. Today we can add another market indicator to the “trouble” list – The US Dollar.
I’ve mentioned the inverse relationship between the US Dollar and stocks several times. This relationship began in 2002 and continues today. The chart below shows that as the market bottomed in March 2009, the Dollar index hit a major top.
Why is the dollar surging? Europe. The real reason (in my view) that our stock market has been so effected by European issues is the dollar dynamic. The US Dollar Index measures the US Dollar against a basket of foreign currencies, the largest of which is the Euro. As the Euro (The largest component of the basket) drops, the Dollar will rise.
For the record, the Dollar-Stock phenomena is not quite normal. During periods of strong economic expansion (such as the ’90s) both rose together as money flooded into our markets and pushed up demand for both. Since 2002, however, our economy has been reliant on excess liquidity to prop up our asset valuations. Assets did rise but only as the value of the currency used to buy them in fell.
Bottom Line: The VIX and US Dollar could mean trouble for stocks.
No comments:
Post a Comment