Dorian Gray

In A Watched Pot, I used the term "mirror image". It might be helpful to show one version of this in action. The chart below includes an "overlay expression" that includes the Dow Jones Industrials Average/INDU (top) and the US$ (bottom). It shows that recently, and contrary to typical tendencies, US equity markets have declined during bouts of US$ strength. (And vice-versa, of course.) This specific relationship has been in play for the past ~18 months (since ~August 2003).

[click to enlarge]

Each informed person is entitled to his or her opinion, but I believe this relationship to be not good. IF the US$ does in fact breakout (at ~86), thus ending its multi-years decline (at least for the comparative nonce), then foreign investors must purchase something to close the loop on that particular transaction. But what -- stocks? No, they are declining. Real estate? Hmm, problematic. Bonds? Even more problematic. Gold, titanium, oil, steel? Each declines in its own 'sudden' downdraft.

This specific mirror image bears close scrutiny. It is textbook intermarket analysis. Watch the equity markets, yes. Watch the currencies, yes. But watch also how they react to each other. I have no doubts that the markets send a message, but alas I lack the necessary Rosetta Stone to decipher it.

Comments?