Which Way Is The Dollar Heading? Watch This ONE Signal

I’ve at all times been impressed by the sturdy correlation between the U.S. and German inventory markets. Generally the power in one in every of these markets will help to affect the course of the opposite. Let me present you a long-term chart of the S&P 500 ($SPX) and the German DAX ($DAX):

There are a few fascinating factors I would prefer to make right here. First, discover the correlation within the backside panel. It stays extraordinarily positively correlated. In different phrases, if the S&P 500 is shifting larger, we should always count on the identical within the DAX, and vice versa. That leads me to my second level. The German DAX has damaged out to a brand new all-time excessive. In case you have needed to query the plethora of causes I’ve supplied over the previous yr why I believed the S&P 500 bottomed final June and was poised to rally and make all-time highs, properly here is one other one you possibly can be at liberty to argue. The DAX is at an all-time excessive. Do not blink, as a result of you are going to miss the S&P 500 all-time excessive in the event you do.

Now you may suppose, properly a inventory market is a inventory market and if one goes larger, all of them go larger, proper? You may wish to suppose once more. I’d at all times chuckle when an analyst would seem on CNBC and make disparaging remarks concerning the S&P 500, due to market weak spot in China. Would you prefer to see the identical chart highlighting the correlation between the S&P 500 ($SPX) and the Shanghai Composite ($SSEC)? Verify this out:

Whereas I’d argue there’s extra constructive correlation than inverse correlation, I believe it is moderately apparent that the S&P 500 is far more extremely correlated to Germany than to China primarily based on the 2 charts above.

Based mostly on the sturdy correlation in fairness markets, I started financial power between the U.S. and Germany as a gauge for the course of the U.S. greenback ($USD). In spite of everything, if one nation reveals financial power vs. one other, its foreign money ought to rise. As an financial system strengthens, we sometimes see treasury yields rise. A weakening financial system will usually see the alternative – falling yields as central banks will look to decrease charges to stimulate financial development.

A number of years in the past, I began trying on the relationship of treasury yields between the U.S. and Germany to see if there is a correlation with the course of the greenback. Economics 101 at all times taught me that rising yields would help a foreign money, whereas falling yields would end in a falling foreign money. Once I studied Economics, nevertheless, world economies weren’t so interwoven. It makes extra sense now to take a look at the power of 1 financial system vs. one other to assist decide the course of its foreign money. So let’s take a look at the U.S. 10-year treasury yield ($UST10Y) vs. Germany’s 10-year treasury yield ($DET10Y) and evaluate the distinction vs. the course of the U.S. Greenback ($USD):

The correlation tends to be fairly constructive, that means that when the $UST10Y minus the $DET10Y is rising, the greenback ($USD), as a rule, will rise proper together with it. The other holds true if this relationship is falling. As I take a look at the UST10Y minus DET10Y (high panel), I see what seems to be a really vital help stage simply above 1.0. If this stage fails, then I might see a major drop forward for the U.S. greenback. Nonetheless, if it holds and pushes larger, I would search for one other spike within the greenback.

If you happen to like utilizing correlation and dealing by means of relationships utilizing a typical sense method, then you definately’ll love my first-ever “State of the Market” report that I will be sending out to EB.com members both Tuesday or Wednesday. It was simply over one yr in the past at this time (June 16, 2022) that I referred to as an S&P 500 backside close to 3600. The S&P 500 has risen greater than 20% since then, closing on Friday at 4410, and confirming that the subsequent leg of the secular bull market, that started in 2013, is underway.

I point out this as a result of we’re providing BIG reductions to our annual subscription fee of $997. As a part of our Anniversary Particular, and for the subsequent 34 hours or so (provide expires midnight on Tuesday), we’ll throw in our regular 30-day trial AND two free bonus months. So it is a “15-month for the worth of 12” particular to obtain the most effective market steerage, analysis, and schooling on the planet. Nevertheless it ends tomorrow. If you would like to take us up on this particular, merely write to us at “[email protected]” and put “Anniversary Particular” within the title. We’ll get again to you and assist you to get arrange. This particular will not be obtainable wherever on our web site, so it is catered to people right here at StockCharts.com and people who have adopted me over time as a part of our free EB Digest neighborhood. As soon as once more, it ends tomorrow, so I hope you will make the most of this particular provide and be part of our rising EB.com neighborhood!

Glad buying and selling!

Tom