S&P 500 & Nikkei 225 Correlation

This weekend I posted a chart of the S&P 500 and Nikkei 225 that lined up Japan 1980 to U.S. 1990. It turns out, the graph wasn't the whole story. Here's the total information:
The chart compares the Nikkei 225 in USD (that is, what an American or dollar investor would gain if they bought the Nikkei 225) and the S&P 500 Index in the dollar index (foreigners total return).

What this means is that if the dollar rallied 40% and the S&P 500 Index went nowhere, it would generate a rally that would match the climb in the Nikkei. This crucial piece of data was left out of the previous chart.

From Safe Haven:

Assuming a relationship similar to what Japan went through, the S&P 500 in DXY terms could well rise another 40% pretty much from now until mid-December 2010. Importantly, this is in DXY terms, so if the U.S. dollar were to rally 20% and the S&P 500 17% (as it's multiplied), that would do it. If the market were to only rally to the lower trend line in the... chart, then the total upside would be 33%, split between the U.S. dollar and the equity market.

The Merrill strategists went further, constructing an equally-weighted index of all markets that have crashed more than 45% since 1970 plus the U.S. stock market crash in 1930 and then averaged the recoveries from these crashes (referred to as 'Historical Peak-Trough Index'). They found that strong "relief rallies" are common and that, should this pattern hold for the S&P 500, then it should experience a further 40% appreciation by the end of 2009.

There's another chart of the second scenario.

However, Safe Haven goes on to speculate about record highs in precious metals...which is possible if the market gains purely in nominal price appreciation. If the dollar dropped, equities would have to rise even further, which would certainly be bullish for precious metals.

Since I lean in the deflationist camp at the moment, the more likely scenario is that gold holds up much better than other assets. A serious bout of deflation would take out a few more big name banks and support gold prices. For pound, euro and other foreign currency investors, gold would hit new all-time highs.