Inter-market analysis after a new 2009 high in the equity market

The market made a new high for the year on Friday. There's no doubt that the current trend is very bullish with the recent relentless climb since March. See Figure 1.

However, why was 1025 on the S&P500 (for example) so hard to break? Since the market doesn't operate in a vacuum. Here's a look at S&P500 ETF (SPY) v. the U.S. dollar (Figure 2) and v. Gold (Figure 3) for some insights.

To invest in the U.S. market is a bet on the U.S. market (well obviously) as well as the U.S. dollar. Because we're trading with U.S. dollar in the U.S. market, its fluctuation will affect your return too. Figure 2 is a chart of SPY divided by the U.S. dollar index (an aggregate of the U.S. dollar v. other major currencies). In effect, it's a normalized SPY chart with regards to the global currencies (and thus, more or less the economies). As you can see, we just broke through a long term resistance at 1.30 but is testing a Fibonacci level.

Similarly, the value of Gold is often used as a metric for currencies. i.e. how much money is actually worth. Figure 3 is a chart of SPY divided by the price of Gold. In effect, a normalized SPY chart with regards to the real value of the U.S. dollar (since price of Gold is in U.S. dollar).

Figure 3 is more telling. Although we've been moving higher and higher in the raw SPY, you can clearly see that SPY/\$GOLD has been hitting a ceiling since July. In other words, the market is going up because the value of U.S. dollar is going down versus the companies these equities represent.

While there's been much talk of economic recovery and a new bull market is already with us, I still am not convinced just yet. True, the bears might be MIA. But all signs say that this bull we're seeing is standing on thin ice.

[caption id="attachment_1711" align="aligncenter" width="500" caption="S&P 500 ETF"][S&P 500 ETF][][/caption]

[caption id="attachment_1712" align="aligncenter" width="500" caption="SPY (S&P500 ETF) / \$USD (US Dollar Index)"][SPY (S&P500 ETF)
/ \$USD (US Dollar Index)][][/caption]

[caption id="attachment_1714" align="aligncenter" width="500" caption="SPY (S&P500 ETF) / Gold"][SPY (S&P500 ETF) /
Gold][][/caption]

[S&P 500 ETF]: http://traderpau.files.wordpress.com/2009/08/2009-08-21-spy.png [SPY (S&P500 ETF) / \$USD (US Dollar Index)]: http://traderpau.files.wordpress.com/2009/08/2009_08_21_spy-usd.png [SPY (S&P500 ETF) / Gold]: http://traderpau.files.wordpress.com/2009/08/2009_08_22_spy-gold.png