The Reason Why the Euro (ETF FXE) is Such a Good Lead Indicator for SPX

The reason why the Euro (ETF FXE) is such a good Lead Indicator for SPX (S & P 500) is probably largely because of it's effect on corporate profitability, see the five day Euro ETF FXE versus SPX chart at http://yhoo.it/9zUFZc (can click on other available timeframes like 1 day, 3 months, 6 months, 1 year, 2 years, 5 years, and max). As the Euro in US Dollar terms goes up significantly or substantially, then, the USA's corporate profitability is impacted in a significantly positive way, and, obviously, vice versa when the Euro declines significantly or substantially in US Dollar terms.

This however doesn't necessarily explain why it usually works surprisingly well even on an intra day or on a five day basis. It could be that, given the fragility of the USA's as well as Europe's (their ability to buy USA goods/services if the Euro declines in US Dollar terms, resulting in inflation) economy, that the Euro's correlation with SPX (S & P 500) is relatively high, so that, even on a short term and a very short term basis, it remains a good Lead Indicator most of the time.

The Euro's correlation with SPX (S & P 500) and NDX (NASDAQ 100) the past 180 trading days (as of 11-26-10) is a relatively high +67.24%, see http://www.mrci.com/special/correl.htm (The correlation coefficients in the table must be squared in order to arrive at the correlation).

The Euro's correlation with the DJIA the past 180 trading days (as of 11-26-10) is an even higher +73.96%, which makes sense, because, the DJIA is a bit more dominated by large corporations (dependent on profits from Europe) than SPX and NDX are. I may consider trading DJIA ETFs like DIA and DOG. Ciao