The SPY Continues to Outperform the Euro

Checking in on the relationship between the Euro ($FXE) and the S&P 500 ($SPY) shows the potential for a major move to occur. The question is which way and which one will lead. Let me explain. The ratio chart below shows the the relationship between the $SPY and the $FXE. It had a long run higher from August fueled jointly by a rising $SPY and a falling $FXE. From March it has been in an expanding wedge until breaking out above it the beginning of July and now consolidating. A move over 1.12 in the ratio leaves a target on the pattern to 1.17. Nothing controversial here. It can get there man ways though. The expected path is for the $SPY to move higher and the $FXE to continue lower. No one will be surprised if that happens.

But this could also happen with the Euro dropping and the S&P 500 holding steady. Think about this scenario. The S&P could hold steady while the Dollar and Treasuries creep slowly higher. Without a major move the bizarre correlation between the Dollar, Treasuries and Equities could continue.

Another scenario is that the Euro crisis resolves but the Euro holds steady while the S&P 500 moves higher due to monetary policy easing. Could this happen? It is the perception that matters and the perception that the Euro crisis is solved could happen any day. With that out of the way the focus on the US weakness could easily intensify.

Many are anticipating these two scenarios as well. But the move higher could happen with both going higher, but at different speeds. A solved Euro crisis could move the Euro higher easily. The focus on the S&P then taking center stage could send it higher quickly without a weak Euro. This is the scenario that most are not prepared for.

Which scenario are you playing?

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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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