Friday, January 7, 2011

Watching DXY Correlation

It's a New Year and looking backwards can be interesting. We saw currency markets turning exceptionally volatile and solid results continuing in both bond and stock markets. Precious metals and commodities provided outperformance in 2010.  

Today, it's time to look at now and into the future. It looks to me like the time to reduce equity market risk for conservative portfolio's and to look for an attractive entry point for the new positions. More aggressive portfolio's can tolerate the equity markets better. IMHO, it may be that the equity indexes have more upward resistance from the US$ index which has been busting higher, currently through 81. This can be illustrated with the price correlation between the two prices, which as seen next, no longer seems intact, at least for the recent past.

The graph below shows the scenario as of last night, illustrating the US$ index in candlesticks and the S&P 500 in the black line.



Next is a look at the US$ index with the DBP (precious metals) ETF as a metals proxy. Price weakness is already seen in the metals. The price correlation between these two prices still seems intact.




Here is a look at the larger New York Stock Exch. index showing new highs and lows along with the 50 day and 200 day moving averages charted.



December employment figures were released today by the BLS and the report shows a lower unemployment rate of 9.4%. Here are some expert observations on this report from Claculated Risk and from Mark Thoma on MoneyWatch. They both point out that the improvement is good news however the background data indicates that the number of workers who are actively looking for work has decreased significantly. That is bad news.

A recent article on Bloomberg.com highlights bond market conditions reflecting confidence in North America’s economic recovery as companies across Europe are waiting to see whether the fiscal crisis ensnares more countries.

The bond markets react to currencies as well. Here is a shot of the Ten Year Treasury Note and the US$ index. The price correlation between these two prices no longer seems intact, at least for the recent past.



Here is a shot of the Barclay's Aggregate Index and the US$ index. The price correlation between these two prices seems intact.



Here is a shot of the Barclay's 1-3 Year Credit Index and the US$ index. The price correlation between these two prices seems to have decoupled just this week.



It's been a crazy week to observe. From Bill Cara Community, Patrick had this to say this afternoon ... "The song remains the same and is getting painfully redundant; markets are overbought and listlessly trending higher in lackluster trade. Sellers are few and far between leery of stepping in front of QE to infinity and buyers are reluctantly buying trying to keep up with The Joneses, but for the most part lacking the conviction (or funds) to push prices aggressively higher."