As trading becomes more mechanized, investors must consider not only market fundamentals but also what‘s driving the algorithms. With the proliferation of ETFs, less analysis occurs at the security level, and more analysis occurs on the technical level.

For example, while earnings have grown smartly throughout the post-2008 recovery, the rise in the stock market correlates surprisingly well to the size of the Fed’s balance sheet. During periods when the Fed refrained from purchasing securities, the stock market struggled. The underlying fundamentals really didn’t change, but the algorithms reacted. QE on, rally on. QE off, rally off.

As we entered 2014, the algorithms seemed unsettled. Without a reflexive guide star, stock correlations fell and dispersion among stocks began to rise. The S&P 500 traded in a narrow range on either side of zero into April. This changed in May.

Beginning in May, the U.S. dollar quietly began building upward momentum. As the algorithms took note, money flows and correlations started to build. To gain quick and liquid exposure to the U.S. dollar, traders basically select between U.S. stocks, U.S. bonds and cash. With cash yielding zero, and bonds threatened by the Federal Reserve’s tightening bias, stocks become the natural default. Over time, the correlation between the U.S. dollar and the U.S. stock market approximates zero. However, correlations today register .95, nearly perfectly correlated. As such, the strong surge in the S&P 500 over the last six months reflects the strong surge in the U.S. dollar over the last six months. While this pattern has technical powers, its fundamental powers are less clear.

According to Standard and Poors, 46 percent of the revenue within the S&P 500 comes from overseas. By some estimates, a 1 percent increase in the value of the dollar index could crimp index earnings by 2 percent-plus. With valuations across the S&P 500 already stretched, earnings deterioration from a rising dollar could prove problematic.

However, if the dollar continues to rise, and the algorithm holds, earnings pressure must be offset by valuation expansion. We saw this dynamic in the late 1990s as a strong dollar attracted capital into the S&P 500, even as earnings momentum stalled out. Between the end of 1996 and the end of 1998, the S&P 500 P/E rose from 18 to 28, a 56 percent increase. Over the same period, earnings grew from $11.01 to $11.47, or a measly 4 percent increase. Clearly, that market de-emphasized the fundamentals in favor of the technicals.

It was fun while it lasted, but it ended badly.

Bottom Line: The “dollar up, S&P 500 up” algorithm that has dominated in 2014 could continue. However, the strong dollar’s technical support of the rally may have an opposite effect fundamentally, as large multi-nationals experience resultant earnings pressures. Today, the S&P 500 trades at a multiple of 18 times trailing operating earnings as it did back in 1996. With the world awash with liquidity, and the dollar thirsty, we could see a similar valuation surge as this cycle crescendos.

David Waddell, who is regularly featured in the Wall Street Journal, USA Today and Forbes, as well as on Fox Business News and CNBC, is president and CEO of Memphis-based Waddell & Associates.