The relationship between Stoxx 600 Index and Usd: a “new normal”?

In Intermarket analysis, one of the relationships to consider when we analyse the Stoxx 600 Index is its correlation with the USD. Historically the correlation is negative, that is when the cross Eur-Usd falls, European shares benefit and the index rises. If we look to an historical chart, we can note that this correlation is not always so perfect: during QE (2009-2014), the correlation indicator has been really little in the negative area zone with very thiny red waves.

The Federal Reserve ended its monthly asset purchases program QE3 in October 2014, and starting from that period things seem returned to normality and a pattern emerges: looking to a graph from 2014, we can note that the cross Eur-Usd, is a leading indicator for the Relative Strenght ratio between the Stoxx 600 Index and the Msci World Index. The Eur-Usd trends (lower window in the graph, with inverted scale), anticipate uptrends of the ratio (central window, UP1, UP2 an UP3). And every time that the Eur-Usd spikes, after a little period also the ratio does the same (PK1 and PK2).

The relative strength ratio of Stoxx 600 Index, since 2001, is bearish. But we had main countercyclical waves that have led to interesting stronger medium-term trends: in the chart we can see one of this up trends during Q1 2015, with an up break of the ratio in BK1 point. Another developed in Q2 2016, when the Relative Strenght ratio inverted in the BK2 point, but didn’t have enough strength to overcome the down trend line at the end of Q2 2017. The same pattern is happening now, after the ratio inverted in the BK3 point: there is still space to reach again the down trend line.

The analysis made until now is for the ratio, which indicates whether the European stock market has more strength than the global stock index.

With regard to the trend of the price curve, in the weekly chart you can see that prices have recently passed some levels that I had indicated as important in my previous article (1), that is 40 week moving average and 23,6 Fibonacci level (a). Also the oscillator up crossed the zero zone (b). Is however to be noted that in the last year, whenever prices have reached this area, they hadn’t enough strength to continue the trend (and this has already happened three times!).

All these elements, to which should be added the potential “orthodox broadening formation” that I quoted in my last article (1), lead me to consider the fact that the market still needs time to develop a new medium-term trend with good directionality, and despite many positive elements, caution is required.

(1) http://marketplus.ch/stoxx-600-from-short-term-patterns-to-long-term-consideration/

Mario Valentino GUFFANTI CFTe – SAMT Vice President – Swiss Italian Chapter – mario.guffanti@samt-org.ch

Disclaimer: the above article is for general information and educational purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.