The recent advance in America’s broad real trade-weighted dollar index has attacked June 2012’s 86.3 high (Federal Reserve Board, H.10; March 1973=100, monthly average). That key top rests near August 2008’s 86.7, a level from which the dollar rallied sharply during the worldwide economic disaster that emerged in mid-2007 and accelerated during 2008. The broad real trade-weighted dollar (“TWD”) probably will climb higher (even if only modestly) over the next several months given the current trends in the US Treasury 10 year note, emerging stock marketplaces, and commodities in general. For these present-day marketplaces and their interrelations, keep in mind their 2007-2009 history. Moreover, the current level and probable near term climb in the TWD, when viewed in conjunction with trends in the UST 10 year and emerging stocks and commodities, indicate that a significant plateau in the S+P 500 is or soon will be in place. A walk in the TWD toward or above September 2008’s 88.8 (and especially) October 2008’s 93.9 increases the likelihood of a noteworthy S+P 500 peak.
After the Fed ceased its prior rounds of money printing, the 10 year UST note yield and the S+P 500 tumbled. Although that benevolent central bank embarked on a slow tapering process in mid-December 2013, America’s 10 year government note yields have meandered downhill from 1/2/04’s 3.05 percent top. Shouldn’t US longer term government interest rates tend to rise if significant real GDP growth or widespread hopes for it exist? In an interdependent international economy, the ongoing sideways to down trend in emerging marketplace stocks in general warns of slowing growth in advanced as well as developing nations. The retreat in the overall commodities complex roughly resembles that of emerging marketplace equities.
Are owners of US stocks complacent? Not only do many players in stocks and elsewhere have faith in the Fed. Over the past year and a half, the S+P 500’s percentage declines have been even smaller and of increasingly short duration. This probably has mitigated marketplace fears of a large stock retreat.
Measurement moves hint that the S+P 500 probably does not have much more room to travel upward for the near term relative to 9/19/14’s recent high at 2019. The 3/6/09 major low around 667*3 equals about 2000. The 7/1/10 low at 1011 times two is 2022. The key take-off point of 1343 on 11/16/12 (various renewed easing by the ECB, Fed, and Bank of Japan within several months before or after that date) times 1.5 is 2015. All these levels are around the recent high. Also, within the context of the current long run bull move in the S+P 500, October is an important anniversary month. Recall 10/11/07’s major peak 1576 and the significant 10/4/11 bottom at 1075.
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Walking the Walk- US Stocks and the Dollar (10-5-14)
Charts- S+P 500 and emerging stock marketplace index (10-5-14, for essay Walking the Walk- US Stocks and the Dollar)