The hidden Decline in the Stock Market

Below I have created a very interesting (and I think very telling) chart. I have taken the S&P500 index and adjusted it for inflation by using the price of Gold. The green line graph is the $SPX as typically measured, in US Dollars (at $1092 as of the time of the chart). The candlestick graph is that of the S&P500 divided by Gold which takes out the $USD part of the equation.

This chart is very telling from the standpoint of an American investor. The Rally of the past few months is what I am coining, "the rogue rally". Since July the market has risen significantly, but this chart shows only a portion of that was for reasons other than the $USD decline. In fact, this chart peaked in August suggesting that since then the primary driver of the rally has been the decline in the $USD (increase in Gold's price).

If this is true then in fact the market peaked in real dollars in August and has been making lower lows ever since. Another way of thinking about this is that Gold (inflation) has been rising faster than the market and that an investor is actually losing ground from a purchasing power perspective since August.

A theory resulting from this is if the dollar is in a bottoming process (Gold Topping) then I expect the market to also be in a topping process. Also, the spread between the two indices is pretty wide. I expect them to converge over time as they did during the decline.

The same divergences I am seeing in the cash index are also showing up in inflation adjusted charts as well. Just another tool supporting a topping process may be playing out.