Recent strength in the stock market can partly be explained by the decline in the value of the U.S. dollar, says Sam Stovall, chief equity strategist at S&P Capital IQ.
The U.S. Dollar Index has a strong negative correlation with the S&P 500 of -0.69 over the past three years, according to Stovall. In other words, the dollar and U.S. stocks have tended to move in opposite directions in the aftermath of the financial crisis. A falling dollar has generally been good for stocks.
“The Fed’s third round of quantitative easing has opened the floodgates of liquidity, which, like a boater drifting too close to Niagara Falls, has swamped the dollar, at least for the time being,” the strategist wrote in a note Monday.
Technically, however, the dollar ETF may be due for a bounce after the sell-off. When the dollar was topping in July, bullish sentiment stood at an elevated 82%, according to Kimble Charting Solutions. The greenback’s recent decline has resulted in dollar bulls falling to the 32% level.
PowerShares DB US Dollar Index Bullish
