Ratio Of The S&P 500 To The US Dollar: Can It Foretell Where The Stock Market Is Going?

I'm fascinated by intermarket analysis.  I believe there is much that the everyday investor that does not understand.  OK, by that I mean there is much that I do not understand myself.  I once listened to a market professional talk about the "Dollar Weighted S&P 500″.  This sounds complicated, but in reality it is just the S&P 500 index divided by the US Dollar index.

Some of you are thinking "great, now how do I do that?".  Well stockcharts.com makes it easy.  You type in "$spx:$usd" … the $spx is their symbol for the S&P 500 and the $usd is the symbol for the US Dollar index.  You use the colon to create the ratio.  The result is the ratio of the S&P 500 to the US Dollar index.  I hope that wasn't too basic for you - it is something I've done for some time now but never really explain.

So let's see what we can see from the Dollar Weighted S&P 500 …

I've added line charts for the S&P 500 and the US Dollar index below the ratio chart.  This gives us a little more understanding as to what's happening.  Overall, it would appear that the indices tend to move in opposite directions.  The ratio chart seems to be an exaggerated version of the S&P 500 chart.

However, I see something different.

I've added vertical lines to correspond to major shifts in both indexes:

• August 2008 when the US Dollar started to rally
• October 2008 when the S&P tanked
• March 2009 when the Dollar topped and the stock market bottomed
• November 2009 when the Dollar began a turnaround

What stuck out to me is the way the ratio performed when the US Dollar was rallying and the stock market was trending sideways.  Sideways could describe the market form late 2009 to early this year - minor rally but nothing like what was seen between March and November.  Sideways could also describe the stock market in August and September of 2008 …

I think you might see where I'm going with this.

The ratio of the S&P to the US Dollar took a dive in September of 2008 … right before the overall market followed suit.  Currently you can see a dive in the ratio.  Could this be foretelling a similar precipitous drop in the stock market?

I am not ready to call for another huge drop in the stock market.  I tried that in 2009 and it didn't work.  Kidding.  Although, I have been feeling more bullish lately - which would make it the perfect time for the market to go nice and bearish.

Eddie Mush of the Market … that should be the name of the site … not Student of Markets.

We will have to see where the ratio goes