S&P 500 V.S. U.S. Dollar Index Forecast: A Reversal?

The 2-year chart below compares the S&P 500 index to the US Dollar index, and one thing is clear: when one goes up, the other goes down-except that one followed the other between 1/31/2020 and 3/9/2020.

The USD and the S&P 500 generally move in opposite directions. S&P 500 stocks are valued in USD. When the value of the US dollar rises, it takes less US dollars to purchase assets valued in US dollars… As a result, the prices of those assets tend to decline.

The trend reverted as the US Dollar index failed to break over 102.99. The Almighty Dollar continued to fall until it reached a low of 89.2 on January 6, 2021, before reversing direction. The S&P 500 index, on the other hand, continued to rise and ended at a record high of 3886. Both indices have been trending in the same direction over the last month, closely mirroring the pattern seen between 1/31/2020 and 2/20/2020.

It is exceedingly unusual, however, to have both the S&P 500 and the US dollar fall at the same time. That has only happened a few times in the previous 30 years.

Based on what we see in the chart below, can we infer the S&P 500 is nearing a short-term peak and it’s time to take profits or write cover calls against the shares we hold to offer downside protection?

 

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