At The FRED Report ( www.theFREDreport.com) we have been bullish on international markets, especially Asia. You can see our Aug. 8 article on Asian ETFs for more discussion on this.

One of our main reasons for this stance has been the chart of the U.S. Dollar Index. While the dollar still looks intermediate-term weak, it is oversold and could start a short-term rally from this general area.

This appears to be confirmed by the charts of the FXE (Rydex Currency Shares Euro Trust) and the FXY (Rydex Currency Shares Japanese Yen Trust). We show daily charts of these ETFs to "zero in" on the short-term resistance.

 

This currency situation can have some ramifications for the stock market. First, due to a weakening dollar it is possible that stocks with foreign currency exposure may start to do better, at the expense of issues with only domestic revenue. We can see that in two stocks within the XLY (SPDR Select Sector Consumer Discretionary), one of our favorite sectors. Note MCD and CMCSA, below. CMCSA is largely domestic revenue while MCD is a company with multinational revenue. See how MCD has outperformed on an intermediate basis.

 

Second, a weakening dollar may cause big-cap stocks to outperform smaller cap names. We show three index ETFs below, to illustrate this: the OEF (ishares S&P 100 Index Fund ETF), the SPY (SPDR S&P 500 Trust), and the IWM (Russell 2000 Index iShares).  The OEF consists of the 100 largest cap stocks in the SPY and the IWM is 2000 small to mid-cap stocks. Note how the OEF is the strongest chart, and the IWM is the weakest.

 

 

 

As mentioned, the dollar appears poised to start a short-term rally, which could test the 81 area on the chart above. Should the greenback then turn down, we could see a year-end rally led by larger cap issues. This would be a distinct change in the sort of market action we have seen in 2009 and 2010, and investors need to be prepared to adjust portfolios accordingly.

Fred Meissner is founder and publisher of The Fred Report. Fred is a CMT and past President of the Market Technicians Association (MTA). He recently left Merrill Lynch's Market Analysis Department and Sector Strategy Department to form The Fred Report. A detailed bio is here: Fred Meissner.