5/27/11 ... The Dollar's strength impacts the relative value of US against foreign stocks.  It's a yardstick for the strength of their relative economies. As John Murphy (StockCharts.com) points out,  when money flows into the US markets, the dollar grows stronger, and it's value moves higher.  Thus, a stronger currency reflects a strengthening U.S. economy.  There's a downside however.  When U.S. stocks become favored over foreign stocks, American investors can lose money two ways when they invest in foreign stocks:  by falling stock prices and by the weakening foreign currency.  Conversely, foreign stocks do better relative to US shares when the dollar weakens, though it's true that will favor some of our big international stocks. The following chart contrasts the movement in the European market (VGK) relative to the S&P 500(grey line) versus the trend in the US Dollar Index's (UUP) (green line) movement over the last two years.  When the dollar strengthened, the European market fell relative to the S&P, and conversely, when the dollar weakened, the European market outperformed the S&P.  This inverse trend in the two is easily seen in the inverse relationship between the red and blue trend lines.

5/27/11 ... The Market rotates by favoring its different segments.  In the following chart, the rotation among the market capitalizations and their respective value/growth sub-segments is shown for the past two years -- all relative to the large cap S&P.  Clearly, small and mid cap growth stocks are now favored while larger cap value was favored earlier in the year.

5/27/11 ... Money flows among its various investment vehicles.  When the market's risk increases, it tends to flow into defensive measures.  As shown in the chart below, which tracks the performance of various vehicles against the S&P, over the past past couple of months, the defensive segments (Consumer Staples, Healthcare, Utilities and Bonds) have outperformed the S&P while Energy and Commodities have underperformed.  That's tending to reverse over this past few weeks.

5/27/11 ... The Relationship between the performance of the Consumer Discretionary and Staples sector provides us another metric to track market health.  As the economy turns down, Consumer Staples--things like toilet paper and toothpaste--are always needed while those more discretionary purchases are put off; hence, the ratio moves directly with the S&P, falling when it turns down and rising when it rises.  Of most interest to us now is that the ratio seems to be turning over these past few weeks, as we now enter the bad five months of the year for stop performance.