With the S&P500 trapped in a narrow range the last few days the governments unemployment report should go a long way in helping it break to one side or the other. Thursday brought on more mixed signals as financials (XLF) broke to new highs for the week but copper broke to new lows. Furthermore, our markets seem to be battling with the notion of improving data here at home and strong corporate earnings vs. a European debt crisis that seems far from over. The more distracted our markets can be from the debt crisis the better it will be for the bulls.
One point of emphasis we’d like to make is in respect to the U.S. dollar and the SPX. The dollar has clearly firmed up and has been uptrending for since September. Since May, as the dollar has risen the S&P500 has declined, causing an inverse correlation. The dollars ascent to highs in early October and late November saw this inverse correlation remain in tact, as SPX declined sharply on both occasions. On Thursday however, the dollar closed at its highest level in over 11 months. Meanwhile SPX is still within striking distance of its October highs.
The question then becomes, is this inverse correlation finally breaking off or is there simply going to be a delayed reaction? If it the answer is the ladder then we should either see the dollar decline or SPX decline sharply very soon. In an ideal world, the dollar should be able to rise because our domestic data has been much improved lately and the Euro is at its lowest level since September 2010, without affecting SPX. Whether or not that will indeed happen remains be seen, but for now we can’t write off what has been an obvious inverse correlation for the last few years.
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