Not so Bullish After All

As we reminded our readers a few posts ago, ancient Wall Street wisdom teaches that “bull markets climb a wall of worry.”

We suggested that, what with so much to worry about, perhaps we should be on the lookout for a bull market. Not that we have any sane reason for expecting one. But that’s sort of the irony of the premise, isn’t it?

At any end, we got to wondering just how much of this substantial move from the pits of March to giddy days of this week was indicative of genuine market optimism, and how much was the simple algebraic readjustment of the numerator (the index) as the denominator (the currency) continues to shrink.

The answer is summed up handily by the following graph:

We simply grabbed daily closing data for the $/Eur and the Dow going back one year. We took the first day of $/Eur data to be the baseline and normalized successive $/Eur prices to it by creating a ratio of each to the baseline day. We then multiplied by the Dow by the successive ratios in order to adjust it for the changes in the value of the $/Eur.

Since the world didn’t end after all, at least not yet, we enjoyed a pretty nice bounce from March. But not as nice as it would appear in passing. All things being equal, there’s a sizeable correction in store in the Dow unless earnings can grow fast enough to cushion a realignment in currency rates, assuming there is one.

Everybody's really worried about the dollar, too...