Correlation: stocks & commodities will pullback, USD will bounce

Correlations between asset classes are very strong right now. We can use correlations to develop short term cases for various markets.

Stock market and U.S. Dollar

Recent studies suggest that the U.S. stock market will face some short term weakness (click here and here), while the medium and long term are decisively bullish.
There is a strong inverse correlation between the S&P 500 and U.S. Dollar Index right now. This inverse correlation suggests that the U.S. Dollar will bounce a little more when the U.S. stock market pulls back.

The correlation between stock markets is even stronger. Here’s the S&P 500 vs DAX (German stock index).

This correlation suggests that the S&P 500 and DAX will pullback together.
The SSEC (Chinese stock index) and S&P 500 have a positive correlation too. This correlation suggests that the S&P 500 and SSEC will pullback together.

U.S. Dollar and Commodities

There is a strong negative correlation between gold and the U.S. Dollar Index. A U.S. Dollar Index bounce implies that gold will pullback even more.

Silver’s inverse correlation with the USD isn’t as strong as gold’s inverse correlation with the USD.

There is moderately inverse correlation between the U.S. Dollar and oil. A U.S. dollar bounce implies that oil will fall a little more.

There is moderately inverse correlation between the U.S. Dollar and copper. A U.S. dollar bounce implies that copper will fall a little more.

U.S. Dollar and Interest Rates

There isn’t a clear and consistent correlation between the U.S. Dollar and interest rates. Here’s the USD Index vs 10 year Treasury yield. The correlation swings back and forth between negative and positive.
Hence, we cannot use the U.S. Dollar’s direction to predict the direction of interest rates.

Rates (especially short term rates) are extremely overbought on a medium term time frame. Here’s the 2 year Treasury yield and weekly RSI (14). It has already made a bearish divergence on the weekly bar chart. We can expect a pullback in interest rates over the next few weeks.

4 comments add yours

  1. Thanks for all the great insight that you provide everyday for free. I have really enjoyed reading your daily posts and look forward to them. Thanks you for providing this!

  2. As always, thanks for all the excellent insight!
    And I’m sure you’ve answered this question in the past, but I can’t find your answer.
    How do you define “short-term” vs “medium-long term”?
    Does “short-term” mean within the next 2 mos, for example?

    • For the stock market:
      1. The medium term is “big rallies” between “significant corrections”. Long term is the rally between bear markets. Short term = the 6%+ “small corrections”. Generally speaking the medium-long term is >6 months.
      2. I use the same definition for other markets like forex and commodities. Basically short term = a few months, medium-long term = more than 6 months. Keep in mind that I don’t trade forex and commodities. I’m just selling some assets on the side to buy silver for the long term.

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