Picking up where they left off Friday, major averages rallied strongly Monday, even as the dollar continued to come unglued. At some point, according to pessimists, a falling dollar will reduce the appeal of U.S. assets to foreigners, resulting in pronounced weakness in both U.S. equities and Treasuries. But if that time is coming, it's clearly not here yet. After trading as high as 8743.48, the Dow Jones Industrial Average closed up 1.4% to 8726.13, its highest close since Jan. 14. The S&P 500 gained 1.3% to 945.11, and the Nasdaq Composite climbed 1.4% to 1541.40, its best close since June 6, 2002. The S&P easily surpassed its Dec. 2 closing high of 934.53. Its post-October intraday high of 954.32 would appear to be the index's next major technical obstacle. Beyond that is the S&P's August 2002 high of 965 (more on that below). Advancing issues bested decliners by 11 to 5, and new 52-week highs swamped new lows by 278 to 4 in Big Board trading, and by 199 to 4 in over-the-counter activity, where 1.7 billion shares traded. About the only negative was that volume -- at 1.3 billion shares on the Big Board -- wasn't more impressive. Individual standouts included Cisco ( CSCO), Raytheon ( RTN) and Ann Taylor ( ANN), which were separately upgraded by sell-side analysts, as well as Altria ( MO), the subject of positive comments in Barron's. Also, SBC Communications ( SBC) rose 4.6% after Illinois passed legislation allowing the carrier to raise rates for network access. As stocks built strength throughout the session, Treasuries lost some of their early gains, but the price of the benchmark 10-year note still closed up 15/32 to 100 1/32, its yield falling to 3.62%. Neither stocks nor Treasuries seemed terribly perturbed about the dollar's latest decline, which followed weekend comments by Treasury Secretary John Snow. On ABC television's "This Week," Snow said: "When the dollar is at a lower level, it helps exports, and I think exports are getting stronger as a result" of the dollar's recent weakness.
Snow's comments sparked a torrent of dollar selling in Asia and Europe, where the euro traded above $1.16 and the dollar as low as 116.35 yen. The dollar stabilized in New York, but the euro was still up from Friday's close of $1.1495 and at a four-year high of $1.1537 in late New York trading. The dollar was at 117.01 yen vs. 117.21 yen on Friday.
March, the so-called strong dollar policy never had much meaning, beyond the implicit threat of intervention attributed to it by currency traders. Now, traders see that threat as increasingly toothless, given recent comments by Snow, his predecessor at Treasury and other Bush administration officials, as well as the Federal Reserve's policies and statements. Monday's session was just the latest in a series in which declines for the greenback have done nothing to stop equities' rampage. The bullish spin on the falling dollar is well known: A weaker dollar improves the outlook for U.S.-based firms that generate significant sales overseas. DuPont ( DD), Procter & Gamble ( PG) and Kellogg ( K) are among the firms whose first-quarter results were enhanced by more favorable currency translations. There's also the argument that the correlation between the dollar and stocks is pretty tenuous. Yes, stocks and the buck ran hand-in-hand through the verdant fields of the late 1990s. But there's been myriad other instances when the two have not correlated or have moved in opposition. An oft-cited example of the latter occurred from 1985 to 1987, when stocks rallied sharply even as the dollar was being systemically degraded by policymakers. Jeffrey deGraaf, chief technical analyst at Lehman Brothers, recalled that some of the "best rallies" in Japan in the 1990s occurred "while yields of Japanese government bonds collapsed and the yen stumbled vs. the dollar."
Of course, the 1985-87 episode culminated in the U.S. stock market's crash in October 1987, and deGraaf recalled that those 1990s rallies in Japan "proved to be temporary." But clearly, scant few market participants are worried about the current stock rally being temporary, and certainly not about any crash. (Notably, the VIX fell 2.8% to 21.42, its lowest close since May 24, 2002.) In fact, deGraaf suggested that any "bearish tone on equities because of dollar weakness
in the future, presumably is better used as a supporting factor rather than the catalyst for a negative view." (Emphasis his.) Then again, the technician conceded both Treasuries and equities will become vulnerable "if the falling dollar is the genesis for a flight of capital." I'm sympathetic to that view, but only the bears seemed vulnerable Monday. previously. Alternatively, if the S&P fails to materially exceed 965 fairly soon -- preferably on heavy or "expanding" volume, as technicians say -- there could be a pretty hefty selloff through summertime. RealMoney.com contributor John Roque of Natexis Bleichroeder has argued that the S&P is unlikely to fall below 900 on any near-term pullback, but a retest of the March lows near 789 or even the October lows of 769 is not unthinkable. Hard-core bears say a break of the October lows is inevitable, but what else are they going to say? My best "guess" is that this second scenario comes to pass -- at least directionally -- and then there's a fourth-quarter rally that leaves major averages right around current levels at year-end. If nothing else, historic seasonal patterns support such a view. Then again, everybody knows about the market's seasonal patterns and is watching the same "breakout" levels cited above.