We asked traders if equities can keep riding the bull market

April 30, 2015 02:24 PM

Matt Weller @MWellerFX


As many traders know, Economics 101 textbooks tell you that a strong dollar will hurt the overseas earnings of large multinational companies, eventually leading to weakness in those stocks. This explanation makes sense in theory, but as the pithy wordsmith Yogi Berra once noted, “In theory there is no difference between theory and practice. In practice there is.”

When we look at the actual data, we can see that the U.S. dollar and U.S. equities do not have a consistent relationship whatsoever. The rolling 21-day (1-month) correlation coefficient, which mathematically measures the extent to which two data series move together, is currently -0.27; this means that over the last month, U.S. stocks have tended to underperform on days when the dollar outperforms. That said, the 1-month correlation was actually positive last week (indicating that the dollar and S&P 500 tended to move in the same direction).

More to the point, the 1-month correlation has “flipped” from positive to negative seven times already this year, showing no consistent relationship between the USD and U.S. equities. Meanwhile, the longer-term 6-month rolling correlation actually stands at 0.54, showing a positive relationship between the greenback and U.S. stocks.

Given the lack of consistent relationship between the dollar and U.S. stocks, traders should analyze each asset on its own merits. A strong dollar certainly doesn’t preclude continued strength in equities.


Matt Weller is the Senior Technical Analyst for FOREX.com. He contributes regular updates on various currencies and commodities throughout the day.

 

Image via flickr

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