The Dollar and Stocks Can Ride Higher Together

• Posted by Greg Harmon
• on September 25th, 2014

Those in the camp that the markets are showing signs of topping have pointed to many different indicators. Yet the one that matters, price, continues to hold up and make higher highs. The latest such indicator that has been dragged up is the strength in the US Dollar Index ($UUP). It is an old Wall Street tale that the Dollar Index and the Stock market move in opposite directions. But is this really true? Take a look.

The chart above shows the the monthly price action for the US Dollar Index in the top panel. In the bottom panel it is shown again but in a way to compare it to the S&P 500 ($SPY). And if you looked at the period from 2003 forward it would be hard to find any prolonged periods when the Dollar Index and the S&P 500 moved together. But fortunately I have more data. And the period from 1995 until 2001 shows that both the Dollar Index and the S&P 500 rose together. For 6 years. What makes this even more interesting is what was happening to the US Dollar Index at that time. It was rising in a strong trend, gaining 50% over those 6 years.

So the last time the Dollar Index and the S&P 500 moved together for a prolonged 6 year period the US Dollar Index was gaining strength quickly. Interesting, huh. Especially if you look at the top panel of the chart again. This panel shows that the US Dollar has gone through a 7 year consolidation, in a symmetrical triangle. And with only 4 trading days left this month, it is breaking out of that pattern in September. The break targets a move to 102.50, not quite the 50% seen in the 90’s, but substantial. Will history repeat itself?

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