As you can see they’ve pretty much moved in concert over the last year-plus. Since UDN is a bearish fund this means that the S&P has actually moved opposite the dollar. A weak dollar has been cause for celebration and a strong dollar has closely preceded most of the drops in the S&P.
But can the performance in the dollar provide a trading edge in the S&P? Below is the equity curve of an incredibly simple system. If UDN outperforms SPX on the day, go long SPX at the close. If UDN underperforms, go short SPX at the close. Basically you’re either 100% long or 100% short depending on how the dollar (inverse) performed that day relative to the SPX. For purposes of the test, no commissions or slippage are included.
That’s more than an 82% non-compounded gain over the last 18 months. This edge won’t last forever. Still, this should demonstrate that the correlation between the dollar and the S&P is important. Moves in the dollar have a definite impact on the S&P. S&P traders would be well served to monitor the dollar’s performance closely and on an ongoing basis.
7 comments:
UNP, which is the US Dollar Bearish Fund ETF?
Should be UDN right?
Excellent post - but I'll bet you will be irritated when you discover you misspoke and said UNP instead of UDN!
Thanks guys - yes. The charts said UDN, but I typed UNP in a couple spots for some reason. Thanks for alerting me.
can you do two more studies:
1) dollar following the s&p (use same data) rather than s&p following the dollar
2) s&p following itself, usin same trading strategy
thanks
On a hypothetical day that UDN is -2% and the SPX is -1% would you say that UDN outperformed the SPX and go long SPX at the close?
i wonder how the equity curve changes if you do this on an hourly basis, or a weekly basis?
Is your profit chart based on closing the trade at the open or close of the next day
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