NEW YORK (TheStreet) -- The stronger dollar will hurt earnings of U.S. multinational companies, including three Dow components: General Electric (GE) , 3M (MMM) and United Technologies (UTX) . And given the risk, investors should consider booking profits on these stocks ahead of third-quarter earnings in October. Here's why, and how you can protect yourself.
Sales made in foreign currencies must be converted into dollars. A weaker foreign currency converts to fewer dollars, reducing revenue and earnings per share. The strong dollar means more U.S. companies will miss analysts estimates when third-quarter earnings season begins in October.
These daily and weekly charts below illustrate the currency risk for the euro vs. the dollar and explain the correlation between a weak euro and lower U.S. stock prices.
The "Death Cross" Chart
Let's look at a price pattern for the euro vs. the U.S. dollar on the daily chart below.
Courtesy of MetaStock Xenith
The euro had been trading above a rising 200-day simple moving average (green line) until July 2, when the third quarter began. The break below the 200-day provided a warning that the rising trend for the euro had shifted to a declining trend. The declining trend for the euro was confirmed when the 50-day simple moving average (blue line) declined below the 200-day on July 7.
This negative moving average crossover is known as a "death cross" to technical traders.
Don't Ignore the Dow/Strong Dollar Correlation
Let's look at a price pattern for the euro versus the U.S. dollar on the weekly chart below.
Courtesy of MetaStock Xenith
The down trend shown between May 2001 and July 2012 shows a decline of 19% for the euro vs. the dollar. Over a similar time horizon, the Dow Jones Industrial Average (DIA) had a 19% correction. The stock market has not had a correction of this magnitude since then.
Investors should not ignore this correlation, which is masked in today's stock market. And the Federal Reserve's FOMC told investors on Wednesday that its low interest rate policy would continue for a "considerable time."
What to Do
Investors should consider booking profits on the three conglomerates in the Dow 30.
- General Electric ($26.34 as of 10:45 a.m. Friday) has currency risk in almost every currency on the planet. Foreign sales of products such as medical diagnostics equipment and jet engines will be converted to fewer dollars.
- 3M Company ($147.31) has currency risk on global sales of Post-it notes and tape and on sales of health care devices and security systems. 3M shares have led the Dow higher, with both setting all-time highs on Thursday. Given continued strength investors should consider entering a "good-'til-canceled" limit order to sell strength to $152, a share price that I project should limit the upside for 3M shares.
- United Technologies ($108.44) has currency risk on worldwide sales of gas turbines, Carrier heating and air conditioning and Otis elevators.
At the time of publication the author held no positions in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.