Stocks Gorge on Dollar Dip

The Dow pushes above 13,000 even as some gripe the gains are tame, adjusted for the greenback's decline.
Author:
Publish date:

Money made by large-cap companies in higher-valued currencies translates into bigger profits when counted in dollars. But celebrating a weak greenback is not prudent for very long.

A weak dollar is eventually inflationary, and in the short run, stock market rallies amid a falling currency can look a bit like a dog chasing its tail.

The

Dow Jones Industrial Average

closed above the 13,000 milestone Wednesday, after gaining 1.1% on the day to finish at a record 13,089.65. The Dow is up 4.8% since Jan. 26, when the trade-weighted Dollar Index peaked this year. Since then, the dollar has fallen 4.5%, so the Dow's gains are just better than a wash. The

S&P 500

has added 5.1% in the same period, closing up 1% Wednesday at 1495.42, its highest level sine September 2000.

"Are stocks going up or is the measuring stick going down?" asks Jeffrey Saut, chief investment strategist at Raymond James. The Dollar Index has lost over 33% since its peak in January 2002, he writes, while the Dow has rallied about 30% in the same period.

Saut quips: "I know money mangers in Europe saying, 'What rally?' "

That may be true when looking at the broad indices, even as proxies such as the Russell 2000, S&P MidCap 400, Dow Transports and Dow Utilities hit record levels in concert with the DJIA.

But according to Merrill Lynch's list of the top 50 companies in the S&P 500 by ratio of foreign sales to total sales, investors are definitely buying into the idea that the weak dollar means strong profits. And for some stocks, the resulting gains have more than made up for the dollar's fall.

Texas Instruments

(TXN) - Get Report

, which measures 86.9% of its sales overseas, has added 14% since the dollar's Jan. 26 peak, including a substantial 8% jump Tuesday when the company beat earnings expectations. Texas Instruments continued to rally Wednesday, adding 1.2%.

Oil service company

Baker Hughes

(BHI)

added 8.2% on its strong earnings report Wednesday. It has gained 18% since January's dollar peak.

Exxon Mobil

(XOM) - Get Report

, which ranks among the Merrill list with 69.1% of its sales overseas, has added 8.5% since the dollar's top for the year. The oil company was a contributor to Wednesday's Dow rally, adding 1.7% on the day after reporting strong earnings and an increase in its dividend payment.

But the biggest celebration of the day was not for a foreign sales story. Internet retailer

Amazon

(AMZN) - Get Report

surged 26% on its earnings report.

Apple

(AAPL) - Get Report

may not be far behind, as the company's shares were up 7.3% in after-hours trading on its

blockbuster first-quarter profits. Apple had added 2.2% in the regular trading session as well.

Gains by Apple and Amazon helped the

Nasdaq Composite

rise 23.35, or 0.9%, to 2547.89 Wednesday.

Investors are rewarding companies' good news more robustly than they have in prior quarters when expectations were higher, says Marc Pado, chief market analyst at Cantor Fitzgerald. Giant surges like Amazon's 26% or

Whirlpool's

(WHR) - Get Report

13.8% gain Tuesday, or even

IBM's

(IBM) - Get Report

3.7% jump Tuesday worry Pado.

He believes the stock market may be ready for a pullback, which sets up the classic "sell in May and go away" phenomenon.

"I think this rally has gotten to a point where it is a profit-taking opportunity," says Pado.

But Louise Yamada, of Louise Yamada Technical Advisors, says judging the rally is all about the follow-through.

"It's too much," says Yamada of some individual stocks' breakouts. "People need to settle down, and then you find out what investors really think, if the enthusiasm continues."

She notes that IBM's break this week past $100 a share is a break through technical resistance that had been in place for five years. Amazon broke out of a two- to three-year base Wednesday, she adds.

Also, some of the pharmaceutical companies that have been handsomely rewarded this earnings season have had what Yamada calls breakouts.

Schering-Plough

(SGP)

and

Eli Lilly

(LLY) - Get Report

moved beyond resistance levels that had been in place for three to four years, she says.

But Yamada notes that big-cap bellwethers

General Electric

(GE) - Get Report

and

DuPont

(DD) - Get Report

attempted the same heroics earlier this year, only to fizzle out.

GE broke through its resistance level of $37 in January but fell back, and closed at $35.41 Wednesday. DuPont surpassed $50 earlier this year, but fell below that level again in March. The stock needs to break through $50 to break out of a six-year range, says Yamada. DuPont closed Wednesday at $49.97.

In the meantime, earnings season is likely to provide more pops on the expectations roller coaster ... until the popcorn gets burned.

In keeping with TSC's editorial policy, Rappaport doesn't own or short individual stocks. She also doesn't invest in hedge funds or other private investment partnerships. She appreciates your feedback. Click

here

to send her an email.