Dollar Squalor and SPX Flowers
The aforementioned SEAL, in an effort to extract some value from his MBA, ran a regression using the SPX as the dependent and the DXY as the independent variables. He checked the relationship throughout the decade of the '90s and since the beginning of '03.
A few items of (potential) interest popped out:
- Throughout the 90's the dollar tended to trend with the S&P 500 (up $ tended to go with up stocks). The relationship wasn't exceptionally "tight" (r2= .485) but was meaningful.
- The last two-odd years have flipped the script with a weak dollar strongly correlating with up markets. So not only did the directional effect switch, the correlation moved to an R2 of .87.
- For even more fun with numbers we plugged in a technical DXY target for a breakdown (we used 81, your charting may vary) and figured out the implied SPX level that would go with an 81 level for the DXY. In other words, we asked "If the DXY breaks to 81, what does the above correlation suggest as a corresponding level for the SPX?"
- The "answer" was SPX: 1260. Raise your hand if you've heard "Mid-1200's" as a target level from the suddenly ubiquitous technical crowd recently.
- [raising my hand]
Not that we are in need of any more reasons to chase or that data mining is a perfect investment M.O... but it seemed worth sharing as we collectively put the pieces together.
We'll resume snarky jokes and references to professional wrestling after I spend a few minutes icing my brain.
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