from the toronto star today...
Weaker U.S. dollar could be bullish for markets
Bill Carrigan
BUSINESS COLUMNIST
Getting Technical
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Last Wednesday's market tumble was a setback for bullish investors counting on a summer advance that could carry through to October. The nasty sell-off had the potential to push some North American indices down through their April lows and render a potential new bull cycle null and void.
On Thursday, the bulls regrouped and attempted to snatch victory from the jaws of defeat, with a little help from the financial services stocks, C-Mac Industries Inc. and renewed weakness in the U.S. dollar.
That morning, we learned of the acquisition of TSE-listed C-MAC by the Los Angeles-based Solectron Corp. This is a good omen for the beaten-up technology sector. Solectron is the world's largest contract electronics manufacturer and this deal is typical of the mergers and consolidations that occur at market bottoms, not tops.
Think back to the bull market in the energy sector. Many of our TSE-listed oil and gas producers were acquired by their larger U.S. peers before the big advance in the energy complex.
Healthy equity markets are historically led higher by the financial services sector. Royal Bank of Canada made a powerful statement Thursday when it closed at a new 52-week high, along with the TSE-listed XFN, or the Canadian Financial Index. This may not be a false move, because all of the big Canadian bank stocks closed up on the day to confirm the Royal's leadership.
On Thursday afternoon, bullish investors got some more good news as the U.S. dollar extended its recent losing streak. The price of gold responded by leaping over $5 U.S. on the New York commodity exchange as the weaker dollar made the dollar-priced precious metal cheaper for Europeans. The TSE gold and precious metals subgroup responded by closing up almost 5 per cent on the day.
All this good news is quite a reversal from the doom and gloom of Wednesday. A weaker U.S. dollar is obviously good news for the gold stocks.
And a weaker U.S. dollar would also solve two other problems in the equity markets: It would improve the profitability of the major U.S. multinational corporations such as Microsoft Corp., International Business Machines Corp., McDonald's Corp. and Coca-Cola Co., and it would also boost the sluggish manufacturing sector by making U.S. manufactured goods cheaper to foreigner buyers. A lower dollar, along with the recent series of interest rate cuts by the U.S. Federal Reserve, should get the job done.
Our chart this week is that of the weekly closes of the U.S. dollar index. The current bull market in the dollar began in January, 1999, and it is from that point we can do some leg or wave counting.
The first A to B up-leg advance in the dollar occurred in early 1999. A short corrective down-leg ended in September at C. This set the stage for a massive C to D second up-leg advance that was to persist all through 2000. It is during this period that the U.S. dollar advanced about 30 per cent against the currencies of its major trading partners.
It is no coincidence that the U.S. technology stocks crashed and burned during the same period. The stock market had correctly predicted the looming downturn, due in part to the strong dollar.
The third and final advance in the dollar from E to F occurred in the first half of 2001. Note that the dollar just barely made a new high, which is typical of a third up-leg advance.
The recent drop in the U.S. dollar index from the peak at about 120 to the current 115 seems to be the start of a new bear market for the dollar.
A move under 114 on the index could set the stage for a run down to the 108 level. Hang on to those gold stocks.
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