Correlation does not imply causation, but who ya gonna believe, me or your lying eyes?

Look, we’ve had a classic bounce off of the 200MA following heavy oversold signals. If you stayed short or shorted at or near the lows you didn’t pay attention to the signals. Stocks were massively oversold and a reconnect bounce was coming and OPEX week always makes for a good time to do just that.

The lows were made last Friday and stocks have ramped 5 days in a row since then:

Cue correlation watch the US dollar:

Stocks bottomed the same day the dollar peaked last Friday.
Since then: Stocks up every day & dollar down every day.
Go figure. pic.twitter.com/XOLtweYbUa

— Sven Henrich (@NorthmanTrader) February 16, 2018

Who are ya gonna believe, me or your lying eyes?

Here’s the $ES versus the US dollar index:

I’m obviously not the only one to notice

“You could say that right now, rather than stocks rising around the world, it is the dollar falling against almost everything” – JPM Asset Management

— zerohedge (@zerohedge) February 16, 2018

So you see we’re all currency traders right now whether we like it or not.

So what happens next with the US dollar is key and we’re keeping an eye on key levels. But what appears clear these days: US stocks need a lower dollar to rally.

Another little nugget I noticed:

The sequence:
Fed decreases balance sheet.
Stocks tank.
Fed increases balance sheet.
Stocks rise.#magic pic.twitter.com/lZ7Cb3Wees

— Sven Henrich (@NorthmanTrader) February 16, 2018

Oh I know, correlation does not imply causation, but the Fed has embarked on their balance sheet reduction program and the irony of the Fed’s balance sheet reaching its lowest levels since September 2014 on January 31 and stocks collapsing immediately over 10% seems a rather unfortunate coincidence.

As is the Fed’s balance sheet suddenly increasing by $15B and stocks ramping during the same time period.

I said Powell ain’t Yellen, but we’ll soon know if we will see shock and awe on March 9.

As it stands the recent rally has so far failed to fix the $TNX:$SPX ratio:

So, as far as correlations are concerned, there’s plenty to keep an eye on.

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