The Bullmarket Illusion

This was Tuesdays note

"The S&P rallied brilliantly yesterday to be within touching distance of its October high. The Dollar Index fell sharply and this sell off was one of the major factors leading to the rally in S&P. At least this is what is the consensus opinion and why should I fight it?. It also provides a writer of a note with a brilliant one line explanation for the 2% gain in the US markets.

The commodities rallied too. The Dollar carry trade seems to be in full swing. So equities and commodities can do their thing. Some how on hindsight it looks self explanatory that a fall in the value of the dollar should lead to a rally in other asset classes.

I have a habit of looking at chart of the ratio of Nifty to the dollar. This gives me a feel for what Nifty is doing in dollar terms. This lead me to ask what would one do to look at S&P in similar terms?. The only denominator I could think of is Gold. So I looked at a chart of S&P to GOLD. That chart clears the illusion of the Bull Market in the US. The entire rally from 2003 to 2007 which took the S&P to new highs is absent when one looks at the S&P vs GOLD chart. That chart shows a clear Bear Market which started in Oct 2000 and has continued till date. Even this recent rally in the S&P is but a blip in the chart.

Man, I said all this but do not know how to conclude the argument. What does this mean? From 1929 onwards, the chart of S&P vs Gold has bottomed out when the ratio touched 0.17-0.20. A strong rally in S&P has emerged post that. The ratio is currently at 0.99. If history repeats itself then there could still be a substantial destruction in the real value of S&P or a substantial gain in GOLD in dollar terms before any kind of real rally can be seen in the S&P. Until then it is best to continue to bet on GOLD.

Great, that sounded like a real strategist. But unfortunately I am bound by more earthly pursuits like trading the Nifty. Currently I am long and will increase my long positions if Nifty trades above 4980. Also will consider short position only below 4800."