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Dollar Adds to Stocks’ 2008 Wall of Worry: Technical Analysis

The strengthening dollar may signal a decline in U.S. equities similar to the relationship between the two assets in 2008 during the biggest financial crisis since the 1930s, technical analysis by Auerbach Grayson Co. showed.

The U.S. currency’s rally may coincide with a decline in the Standard & Poor’s 500 Index of as much as 15 percent if the historical inverse relationship between stocks and the dollar holds, Richard Ross, a technical analyst with the New York-based brokerage, said in a telephone interview yesterday. When the dollar rallied 24 percent from July 2008 to March 2009, the S&P 500 went on to lose 44 percent during the eight-month period, falling to a 12-year low.

“The technical specter of a stronger dollar is the latest evidence of a bearish environment for equities similar to what we saw in 2008,” Ross said. “We have a remarkable example of technical symmetry with the meaningful break-out to the upside in the dollar similar to the summer of 2008 when that rally pushed the equity markets off the cliff,” he said. “It is not a contrarian buy-signal, but a true wall of worry.”

The euro had its biggest loss against the dollar in more than a year last week amid concern about the region’s deepening debt crisis. The Dollar Index, which tracks the U.S. currency against those of six trading partners, climbed above its 200-day moving on Sept. 8 for the first time in a year as the dollar increased 5.2 percent from the end of August to a seven-month high on Sept. 12.

S&P 500

The S&P 500 fell 2.5 percent during the first two weeks of September as Greece’s finances deteriorated. Between April 29 and Aug. 8, the S&P 500 fell 18 percent amid concern about the European debt crisis and after S&P downgraded the U.S. government’s credit rating. It closed as low as 1,119.46 on Aug. 8, within 29 points of a bear market, or a 20 percent drop. The benchmark gauge for American equities ended yesterday at 1,188.68, 6.2 percent above the Aug. 8 closing level.

“Global companies dependent on overseas revenues are going to be impacted by a two-headed monster of eroding fundamentals in Europe and the U.S., and eroding technicals now in terms of the dollar,” Ross said. “This ‘perfect storm’ continues and I would be hesitant to think we reached a bottom.”

The analyst said the S&P 500 may test the 1,006 level, which represents a 61 percent retracement of the bull-market advance that began in March 2009.

In technical analysis, investors and analysts study charts of trading patterns to forecast changes in a security, commodity, currency or index.

“Even if you don’t think we’re going to revisit the credit crisis lows of the stock market, this still suggests there’s a lot of room to the downside,” Ross said.

To contact the reporter on this story: Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net

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