Are You Watching This Major Warning Sign For S&P 500 Top?


Summary: The Australian Dollar (FXA) has tumbled despite record-highs in the S&P 500 (SPY). Is the Aussie currency the canary in the coal mine, and does it point to a big S&P pullback?

Strong bull markets in stocks have historically coincided with Australian Dollar(FXA)strength, and indeed the 2009 lows in the S&P 500 (SPY) occurred almost exactly as the AUDUSD established a lasting bottom. Yet a critical divergence suggests a key S&P top may be near.

Last week we highlighted the fact that the sharp divergence between AUDUSD and S&P 500 could partly be explained by a sharp drop in Australian yields (ticker:ticker::AUD). But nothing moves in a vacuum—we can’t ignore the same factors that move yields should be the factors that move equity markets. Indeed, we argue that a bigger correction in bond markets (ticker:ticker::TLH) could be a major catalyst to spark a much larger US Dollar rally.

The question becomes simple: is the Australian Dollar the so-called “canary in the coal mine”? Or in simpler terms, does the Australian Dollar sell-off point to an imminent correction in stocks?

Australian Dollar Plotted Against Relative Moves in S&P 500, Gold (GLD)

View gallery

australian_dollar_and_the_s_and_p_500_body_Chart.png, Are You Watching This Major Warning Sign For S&P 500 Top?

Data source: Bloomberg, Chart source: R

We’re big fans of Dow Theory here at DailyFX, a set of six basic rules derived by Charles Dow that date back nearly 120 years. One of the most important rules is “Stock market averages must confirm each other.” And though we’re talking about currencies and stocks, we feel it’s still relevant here. In fact, our Senior Technical Strategist pointed out a critical divergence between EURUSD (ticker:ticker::FXE) and USDCHF (ticker:ticker::FXF) that preceded the substantial EURUSD sell-off and USDCHF surge.

The fact that the S&P 500 (and broader global equity indices) are hitting record-peaks as the Australian Dollar and commodity markets sell off sharply is a major warning sign. But it’s likewise clear that the only factor that really matters in trading is time.

We’re probably right in calling for a potentially significant S&P 500 pullback, but the critical question is “When?” If it happens after the S&P rallies another 100 big points, we won’t be in a great position to take advantage. Let’s see if trader sentiment can give us some clues. We’ll start with the Australian Dollar:

Retail Sentiment Favors Continued Australian Dollar Weakness

View gallery

australian_dollar_and_the_s_and_p_500_body_Picture_2.png, Are You Watching This Major Warning Sign For S&P 500 Top?

Data source: FXCM Execution Desk, Weekly Sentiment Table

It’s rare that we use such hyperbole in our research, but we recently wrote “Australian Dollar Direction Couldn’t Be Any More Clear” as the number of retail traders long AUDUSD recently hit record-highs. We use our proprietary Speculative Sentiment Index data as a contrarian signal to price action: if everyone’s long, we like to sell and vice versa. Such incredibly one-sided sentiment leaves us plainly in favor of continued Aussie Dollar declines. What about the S&P?

Retail CFD Speculators Are Extremely Short SPX500

View gallery

australian_dollar_and_the_s_and_p_500_body_Picture_3.png, Are You Watching This Major Warning Sign For S&P 500 Top?

This one requires a bit of a leap of faith: retail CFD speculators are essentially their most short the SPX500 contract on record. But—and this is an important caveat—we’ve recently seen a noteworthy build in crowd buying. According to our sample of retail traders, the number of long orders has surged by nearly 60 percent in the past 30 days.

In the interests of full disclosure, we made the same observation in Thursday’s weekly SSI report and yet the SPX500 has moved to fresh highs. Yet we’ll once again defer to Dow Theory—there are three phases in market trends: accumulation, public participation, and distribution.

In plain English, a trend begins as traders “in the know” accumulate (buy) shares/currencies/whatever and push price higher. The second phase is when the public sees the trend and rushes to buy so as not to miss the “obvious” profit opportunity—Elliott Wave fans might call this a “Wave 5”. The third phase is simple enough: the market trend comes to a potentially violent end as everyone rushes for the exits.

Our proprietary retail speculative sentiment data warns that we might be in Phase 2 of this S&P 500 move as the public finally shows itself willing to buy into record peaks. We’re speaking in terms of Dow Theory, but it could just as easily be explained in any terms you like—once the crowd gets involved we’re almost certainly closer to the top than the bottom.

Another few factoids worth considering: the S&P 500 rally has been its most consistent since important March, 2012 peaks and other key market tops. All the while, a key break higher in Australian Dollar volatility prices suggests the AUDUSD may have considerably more room to fall.

Is the Australian Dollar the canary in the coal mine? Certainly S&P 500 bulls might want to reconsider their portofolio weights given that typically-correlated markets such as the AUD or even Gold/Crude Oil/other commodities fail to hit similar peaks.

Forex Correlations SummaryView forex correlations to the S&P 500, S&P Volatility Index (ticker:ticker::VXX), Crude Oil (ticker:ticker::USO) Futures prices, US 2-Year Treasury Yields (ticker:ticker::SHY), and Spot Gold prices in the past 30 days:

View gallery

australian_dollar_and_the_s_and_p_500_body_Picture_4.png, Are You Watching This Major Warning Sign For S&P 500 Top?

Data source: Bloomberg. Chart source: R


--- Written by David Rodriguez, Quantitative Strategist for

Receive future special reports on the Australian Dollar and other studies via this author’s e-mail distribution list with this link.

David specializes in automated trading strategies. Find out more about our automated sentiment-based strategies on DailyFX PLUS.Contact and follow David via Twitter:

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.
Learn forex trading with a free practice account and trading charts from FXCM.


View Comments (0)

Recommended for You

  • Tycoon buys 30 Rolls-Royces for Macau hotel

    A Hong Kong tycoon has placed the biggest ever order for Rolls-Royce cars, agreeing to buy 30 Phantoms to chauffeur guests at a luxury resort he's building in the global gambling capital of Macau. Stephen Hung's $20 million purchase surpasses the 14 Phantoms bought by Hong Kong's Peninsula Hotel in…

    Associated Press
  • Enjoy this refreshing Triple Play offer!

    Get FIOS TV Mundo starting at $79.99/mo. w/ no annual contract + 2-yr. price guarantee. Or sign for 2 yrs. & get a $300 prepaid Visa. Click here.

    AdChoicesVerizon FiOS ®Sponsored
  • Tycoon's arrest sends shock wave through Russia

    Tycoon's arrest sends shock wave through Russia MOSCOW (AP) — The arrest of a Russian telecoms and oil tycoon has sent shock waves through the country's business community, with some fearing a return to the dark days of a decade ago, when the Kremlin asserted its power by imprisoning the country's…

    Associated Press
  • Before You Buy Alibaba, Check Out 4 Top China Stocks

    Before You Buy Alibaba, Check Out 4 Top China Stocks While investors gear up for Alibaba Group 's (BABA) hotly anticipated initial public offering, don't forget about other Chinese stocks that are worth keeping an eye on. Today's Young Guns Screen of

    Investor's Business Daily
  • Costco Stores in Canada to Stop Taking American Express

    “The credit card relationship between American Express and Costco Wholesale Canada will not be renewed when it expires” on Dec. 31, the company said today in an e-mail to Canadian customers. The message was attributed to Lorelle Gilpin, vice president of marketing and membership for Costco…

  • As Fed takes baby steps, Cramer's trick for profit

    In turn, Cramer says making money in the market, involves looking at the environment through the lens of the Fed. "The trick is to remember that they speak for the common person," Cramer said. "The Fed wants the common person to make money." With that backdrop always in mind, Cramer says it becomes…

  • "The Retiree Next Door": How successful retirees stretch their savings

    "The Retiree Next Door": How successful retirees stretch their savingsBy the time she hit her late 40s, Toni Eugenia wasn’t sure she would ever be able to retire. Eugenia, 56, a pharmacy technician who lived in Houston, was nearly $200,000 in debt and

    Yahoo Finance
  • CNBC Anchor Calls Out Fed-Hater Bill Fleckenstein In Startling Shouting Match

    CNBC Bill Fleckenstein of Fleckenstein Capital appeared on CNBC's Futures Now program on Tuesday. Futures Now host Jackie DeAngelis came out swinging, asking Fleckenstein right at the top if he was willing to admit that he had misunderstood monetary policy. Sounding taken aback, Fleckenstein…

    Business Insider
  • AARP® Auto Insurance Program from The Hartford

    50+? Request a free quote and you could save $404* on Auto Insurance from The Hartford!

    AdChoicesThe HartfordSponsored
  • Beanie Babies creator's sentence debated in court

    Beanie Babies creator's sentence debated in court CHICAGO (AP) — Federal prosecutors seeking to put the billionaire creator of Beanie Babies in prison for hiding millions in Swiss bank accounts told appellate court judges Wednesday that the toymaker's sentence of probation threatens to erode the…

    Associated Press
  • Play

    Citi, Bank of America Offer Discounted Mortgages

    Citigroup and Bank of America will offer mortgages at discounted interest rates to help borrowers with low incomes or subprime credit. AnnaMaria Andriotis joins MoneyBeat. Photo: Getty.

    WSJ Live
  • Apple to unveil new iPads, operating system on Oct. 21 : report

    The company plans to unveil the sixth generation of its iPad and the third edition of the iPad mini, as well as its operating system OS X Yosemite, which has undergone a complete visual overhaul, the Internet news website said. Trudy Muller, a spokeswoman for Apple, declined to comment. The iPad is…

  • Margaritaville casino owners seek bankruptcy

    The owner of Biloxi's Margaritaville casino has filed for Chapter 11 bankruptcy protection Tuesday, only hours before a hearing where the landlord aimed to seize the property. The filing by MVB Holding LLC in U.S. Don Dornan, a lawyer for landlord Clay Point LLC, said the company had planned to ask…

    Associated Press
  • Embraer to sell 50 E-175 jets to Republic in $2.1 billion deal

    Brazil's Embraer SA, the world's third largest commercial planemaker, said on Wednesday it booked a firm order from U.S. The deal, which will be included in Embraer's order book for the third quarter, is valued at $2.1 billion, the planemaker said in a securities filing. The planes will be operated…

  • Gilead Stock Is Falling On These Drug Setbacks

    Gilead Stock Is Falling On These Drug Setbacks Gilead Sciences (GILD) shares are backsliding Wednesday on news that the patient drop-out rate for hepatitis C drug Sovaldi is quadruple that of clinical trials. In addition, the biotech's Phase 2 study results

    Investor's Business Daily
  • Follow Your Nose For the Fruity Taste That Shows!

    Kids Asleep? Now's Your Chance to Enjoy a Bowl of Fruity and Delicious Froot Loops®!

    AdChoicesKellogg's Froot Loops®Sponsored
  • Here's What Mark Cuban Wishes He Knew About Money In His 20s

    Cuban is the owner of the Dallas Mavericks basketball team. Billionaire investor and entrepreneur Mark Cuban is generous with his advice. When we asked him what he wishes he'd known about money in his 20s, he said:

    Business Insider
  • Play

    What the Fed Meeting Means for Bonds

    Janet Yellen & Co. are expected to hint at their timetable for raising interest rates. Here's how investors should prepare ahead of the meeting.

    WSJ Live
  • SHOE COMPANY: Our CEO Just Disappeared And Most Of The Money Is Gone

    "and like that: he's gone." This is an actual headline from a company press release: "CEO and COO disappeared, most of the company's cash missing." (Via FastFT) In a statement, German-based shoe company Ultrasonic said its CFO,  Chi Kwong Clifford Chan, has been unable to reach the company's CEO,…

    Business Insider
  • 10 rock-solid stocks for conservative investors

    10 rock-solid stocks for conservative investors Shares with low volatility can beat their indexes with less risk Bloomberg News/Landov U.S. Bancorp is the cheapest S&P 500 stock

  • Billionaire Investor Says Chinese People Work Harder And Western Companies Could Face Deep Trouble After Alibaba IPO

    Michael Moritz, the chairman of VC firm Sequoia Capital, is a huge fan of Chinese internet companies and reiterated his enthusiasm for the Chinese market in an interview with The Wall Street Journal Wednesday. The billionaire investor described the Alibaba IPO as a “major landmark event” that is as…

    Business Insider
  • Top Analyst Upgrades and Downgrades: AEP, BHP, GE, Incyte, 3M, Tyco, Under Armour and More

    Top Analyst Upgrades and Downgrades: AEP, BHP, GE, Incyte, 3M, Tyco, Under Armour and More Stocks were firm on Wednesday morning ahead of the FOMC meeting outcome. Tuesday’s rally may have sparked higher interest again, and investors are looking for bargains

    24/7 Wall St.
  • The New 2015 Sonata®: A Step Above the Competition

    There's a Sonata® that's perfect for you, and this is your chance to build it! Visit the Hyundai® Official Site to customize your 2015 Sonata® today!

  • 6 Things Debt Collectors Wish You Knew

    The work debt collectors do is not popular, and has become increasingly derided by those who don’t like what we do or simply don’t know the facts about debt collection. Too often, debt collection is painted with a broad brush to create a portrait that isn’t accurate, and doesn’t properly educate…