Friday, June 19, 2009

A Dollar's Edge

One relationship I’ve been watching lately is the S&P vs. the US dollar. To illustrate the relationship I’ve created a chart below. In red is the closing prices of the S&P 500. The blue is closing prices of UDN, which is the US Dollar Bearish Fund ETF.

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.


Pivot Trend said...

UNP, which is the US Dollar Bearish Fund ETF?

Should be UDN right?

Mr. Monopoly said...

Excellent post - but I'll bet you will be irritated when you discover you misspoke and said UNP instead of UDN!

Rob Hanna said...

Thanks guys - yes. The charts said UDN, but I typed UNP in a couple spots for some reason. Thanks for alerting me.

Anonymous said...

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


Anonymous said...

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?

Anonymous said...

i wonder how the equity curve changes if you do this on an hourly basis, or a weekly basis?

The Freeman Gazette said...

Is your profit chart based on closing the trade at the open or close of the next day