08.21.2023
With the DXY back above its 200-day moving average, what does history say is next for the SPX?
The US Dollar Index (DXY) is a very popular topic of conversation, and for good reasons. Below is a daily chart of the DXY. Price is now above its 200-day moving average. The question becomes, what might this mean for the S&P 500(SPX)?
Since 1980, the start of the DXY data in Optuma, the DXY has closed above its 200-day moving average for the first time in 252 trading days 30 times, with this most recent cross being the 31st time. The chart below shows the DXY closing above its 200-day moving average on 08/16/2023.
Chart 1: DXY closing above its 200-day moving average. Click To Enlarge.
THE CHARTS
With the DXY closing above its 200-day moving average for the first time in 252 trading days, can history tell us how the S&P 500 might perform over the next 1 and 2 quarters, or 63 and 126 trading days? Yes. Over both the following 1 and 2 quarters, the S&P 500 was positive more than 76.5% of the times or 23 of the last 30 times.
This finding is startling. The loudest narrative on social-media and the news-media is how US equities can only rise if the DXY is falling or stable. The testing shows that this is not always true. 9 of the 30 occurrences, or 30% of the times, the S&P 500 posted double digit returns after the DXY crossed above its 200-day average.
The following charts show the DXY in green and the S&P 500 in black. The 200-day moving average for both price series is colored green when rising and red when falling. The red arrows show when DXY closes above its 200-day moving average, and the grey-highlights last for 126 trading days.
Chart 2: The S&P 500 printed double digit returns 2 times with the DXY rising during the 80s. Click to enlarge.
Chart 3: The S&P 500 printed double digit returns 3 times with the DXY rising during the 90s. Click to enlarge.
Chart 4: The S&P 500 printed double digit returns 3 times with the DXY rising during the 2000s. Click to enlarge.
THE FULL RESULTS
The point of the above charts is to show that US equities can rise even if the US Dollar Index is rising. The table below summarizes the last 30 occurrences of the DXY closing above its 200-day moving average for the first time in 252 trading days.
Some of the S&P 500 gains have been wonderful. Think 1983, 1995, 1996, 1997, 2011, 2012, and 2001. Some of the S&P 500 loses have been very large. Think 1987, 2001, 2002, and 2008. Note how 8 of the 9 times, almost 89% of the times, double digit returns for SPX had a rising DXY.
Table 1: All results after DXY closes above its 200-day average for the first time in 252 trading days. Click to enlarge.
CONCLUSION
So, what does history tell us to expect going forward 126 trading days? The table above shows that all positive returns after 126 days had a drawdown of less than 10%, and 5 of the 7 negative returns had drawdown less than 10%. If were we to buy the S&P 500 now with the plan of cutting our losses at 10%, the average return is just under 5% over the next 126 trading days with a probability of gain of more than 76.5%. If SPX falls 10% or more, we can expect additional weakness in the S&P 500.
Chart 5: Buy SPX after DXY closes above its 200-day moving average for the first time in 252 trading days. Cut losses if SPX falls more than 10%. Click to enlarge.
As always, thank you for reading. I’d love to hear from you.
E-mail: Louis@eastcoastcharts.com
This article is for educational and informational purposes only. The author may or may not have a position in the securities mentioned. Read our full disclaimer here.