Trading with Intermarket Analysis

CHAPTER 13

Stocks and the Dollar

This chapter explores the historical link between the U.S. dollar and the stock market. Over the last decade, the two markets have usually trended in opposite directions. That’s due primarily to the fact that commodities and stocks have been positively correlated. The direction of the dollar also has an impact of the relative attractiveness of foreign stocks versus those in the United States. Commodities are closely linked to emerging markets. China influences the trend of copper and the U.S. stock market. A falling euro hurts European shares more than U.S. stocks. Foreign stock indexes bounce off 2010 lows to keep uptrends intact. Canada plays in important role in global intermarket relationships. How to add the Americas to your foreign stock portfolio will be explained.

■ A Weak Historic Link between the Two

The link between the U.S. dollar and the stock market is one of the most inconsistent intermarket links that I’ve studied. Historically, stocks have done well during periods of dollar weakness and dollar strength. My 2004 intermarket book suggested that the dollar’s impact on stocks needed to be filtered through the commodity markets. A falling dollar, for example, can be bearish for stocks if it produces sharply higher commodity prices (as it did in the 1970s). A falling dollar can coexist with rising stock prices as long as rising commodity prices don’t create an inflation problem. At the same time, a rising dollar can coexist with rising ...