Stocks Remain Vulnerable Against Rising Dollar, Falling Oil Prices

NEW YORK (Walter Brandimarte) - Signs of a Wall Street sell-off are all over the place, but U.S. stocks might well survive another week relatively unscathed if investors keep betting on sectors less vulnerable to an economic downturn.

Pressure for a correction in the stock market has been building up in the past few weeks as the euro and oil prices fell in tandem, knocking down shares of energy companies and dollar-sensitive multinationals.

Still, investors have averted a broad sell-off by diving into shares of companies that are less vulnerable to the economic cycle, including well-known defensive sectors such as utilities and household products, but also large-cap companies with steady earnings performance.

That strategy may hold the market afloat for a little longer. But with the end of the Federal Reserve's easy money policies just around the corner, investors are becoming more sensitive to risk in general.

"There is good reason for a pause, there is good reason to be conservative in here, and there is good reason to raise some cash ahead of a summer correction and a better buying opportunity," said Richard Ross, global technical strategist with Auerbach Grayson in New York.

The sharp sell-off in commodities markets earlier this month was seen by many as the first warning sign of a coming market correction. The U.S. dollar has been strengthening since then, in another sign that appetite for risk is dwindling.

Next month's end of the Fed's massive bond-buying program, also known as quantitative easing, is expected to knock down the value of stocks, commodities and the euro, a recent Reuters poll of 64 analysts and fund managers found.

CONSUMER STAPLES BACK IN STYLE

Ross, who believes that a correction could come at any moment, warned that Wall Street remains close to multi-year highs as investors head into a traditional period of weak seasonality that stretches from May to November.

The Standard & Poor's 500 index .SPX has kept its year-to-date gain of 6 percent for the past two weeks, as defensive sectors such as utilities advanced while more volatile technology shares posted losses.

Despite the rotation between sectors, the S&P 500 has been trading in a narrow range between 1,330 and 1,340, indicating Wall Street's lack of direction. Most technical analysts agree that the market is poised to break out of that range soon -- either with a sell-off or a rally.

Robert Sluymer, an analyst with RBC Capital Markets, said there is no technical evidence that the current market cycle has peaked. He recommended investors keep building exposure to defensive themes, while getting out of cyclical stocks.

Among the defensive sectors favored in the current environment, Standard & Poor's Equity Strategy recommended the stocks in the S&P 500 Consumer Staples Index . For the week, this index was up 0.6 percent.

With the earnings season coming to a close, Wall Street will have just a sprinkling of marquee names set to release quarterly results in the coming week. On tap are earnings from Campbell Soup, Costco Wholesale Corp and HJ Heinz Co, whose stocks are in the S&P 500 Consumer Staples Index. Preppies, take note: Polo Ralph Lauren Corp and Tiffany & Co are also set to release their results. These companies' outlooks could shed light on the consumer's mindset and headwinds facing the retail sector.

As far as economic indicators are concerned, there's no data with overwhelming star power. The calendar includes new home sales for April, a second look at first-quarter gross domestic product, personal income and consumption for April and the final reading for May on consumer sentiment from the Thomson Reuters/University of Michigan Surveys of Consumers.

So investors could very well be at the mercy of the headlines from Europe, where fears about a possible debt restructuring by Greece are on the rise.

With the euro, commodities and stocks trading with extraordinary correlation, investors should look at the euro-dollar trade for direction, said Ross of Auerbach Grayson.

"If you continue to see the dollar strengthening," he said, "it should provide a headwind for commodities and for the S&P."

(Editing by Jan Paschal)

Copyright 2011 Thomson Reuters. Click for Restrictions.

Comments

[OrlJayson]

11:57 AM on 05/24/2011

Wow...so let me see if I can wrap my head around this, a stronger dollar is a BAD thing for stocks? Too bad....fall gas prices and a stronger dollar are good for the middle class. So what if the stock market falls a bit. Wall Street does not matter more the Main St.

Time Main St. became the priority again. If not, we can keep tossing out politicans outta office till they get the message. Dont do whats right for the middle class, you dont keep your job. Its just that simple.

[John C75]

11:53 PM on 06/09/2011

I was thinking the same thing. Lower commodity prices means lower prices for all the goods and services average Americans use. Higher dollar helps at home but hurts businesses that export products to other countries.

[yoozum]

07:00 AM on 05/24/2011

Even though it's splitting hairs here, it's not so much that the dollar is rising, it's that the recent fall of the Euro has outpaced the fall of the dollar, thus raising the dollar's value.

[Stockbroker38]

11:10 PM on 05/23/2011

As a handsome 38-year-old stockbroker, I must point out that though a rising dollar is good for American families (it allows them to buy more potatoes and other peasant foods), it's bad for me and my buddies on Wall Street who like to speculate and short currencies.

[yoozum]

06:59 AM on 05/24/2011

Will you change your username when you turn 39 or will you start from scratch?

[ThePeacemakers]

02:44 PM on 05/24/2011

Here's some food for thought: sounds like an economy that eats itself.

[cody90mph]

10:07 PM on 05/23/2011

Time to do some selling now that things have bounced back. I think a significant adjustment is on the way again, I would like to retire with some money or else I will have to live happily on my upstate land in a tent and fish and hunt and grow a nice crop. Just need fuel and a small landing strip to get about.

[Duppy]

10:00 PM on 05/23/2011

Now its the rising dollar ? Last week it was "the dollar has no value". Here is comment concerning the dollar. All those geniuses out there claiming the dollar is either rising or falling from week to week, need to check their facts before they post. The dollar has literally done NOTHING for years. NOTHING. It has been trading in a range for at least the last 3-5 years..

[greensachs]

08:02 PM on 05/23/2011

if you have some extra minutes here is a somebody that is genuinely revealing the level to which we have been mislead.
Former assistant Treasury Secretary under President Reagan and former editor of The Wall Street Journal.
http://market-ticker.org/akcs-www?post=186707

...it's not like you weren't already aware.

[greensachs]

06:56 PM on 05/23/2011

oh, what a surprise...Central planning, er Central banking knew they had a seasonal window (and political) to roll out the proof of "see, there's no inflation, what inflation" after a bit, back to your regularly scheduled Fed/Treasury devaluing dollar and feeding inflation and predatory banking elite, as well as the moral cowardice and collaboration that it entails.

You go boyz.

[smusmu]

06:53 PM on 05/23/2011

Then start hedging, here is a great example of the pick of the day http://adf.ly/Lxj9
with this type you cant go wrong. Watch it grow from here moving forward. It's your safest bet in this market climate.

[JessWonderin]

02:19 PM on 05/24/2011

right . . gonna jump right on internest googles tube spam . . . .

[Cowboylove]

06:08 PM on 05/23/2011

So if the dollar falls we are in dire straights and if it rises we are in dire straights. My goodness, aren't financial analysts brilliant? How do they do it!

[mizutofu]

06:16 PM on 05/23/2011

And they are right, US is stuck between a rock and a hard place. If the dollar rises, US manufacturing and export will suffer; if the dollar keep falling, there will be inflation

[tvhatic]

02:46 PM on 05/24/2011

Inflation is the general rise in prices of everything. Devaluating vs foreign currencies does not necessarily = inflation, because only imports will be more expensive, but then we get to export more, thus we produce more = more jobs = economic growth.

You are correct it’s a fine line though, positives and negatives on both sides.

[DFWMoneyCoach]

06:02 PM on 05/23/2011

Trillions of dollars of artificial liquidity in play thanks to Mr. B at the Fed.....Europe teetering on a Germany/France dominated banking crisis due to unsustainable debt in the PIIGS....Investors chasing yield in grossly inappropriate investments (gold coins)......Common wisdom saying that China's miracle economy will never crash......yeah, I think watching the Euro makes sense...LOL

[Stephen Leverett]

04:48 PM on 05/23/2011

Every year the money entering the market dries up in the summer. My theory is the big brokers are in hamptons for the summer.

Either way statistics show many fund managers don't move alot of money during the summer. They either ride it out through the summer or they exit in the spring and re-enter in the fall.

my .02 cents

[AG creative]

05:51 PM on 05/23/2011

stock, bond and option holders want to unload short term positions so they aren't thinking about price fluctuatio­ns while they are out in the hamptons

[Drew Puli Wolf]

04:33 PM on 05/23/2011

I know all you Republican economic genius will attach me, but I always thought that the Stock Market did have some relationship to how well the economy was doing. Maybe Investors are worried because the depreciation of the dollar which started under President Bush (2002-2007 the dollar fell 40% against the euro) has helped the U.S. companies become more comparative, has reversed and U.S. companies may now lose market share, and the Fed by keeping interest rates down have allowed companies and consumers to borrow at low interest rates may now raise rates cutting back growth in the economy. But what I’m to know, the Stock Market is just a scheme to take all our money with no basis in any economic reality, that is why all you same Republicans what to get rid of Social Security and have every one invest in the same corrupt Stock Market instead.

[mizutofu]

05:43 PM on 05/23/2011

"Some in our country think that Social Security is a trust fund -- in other words, there's a pile of money being accumulated. That's just simply not true. The money -- payroll taxes going into the Social Security are spent. They're spent on benefits and they're spent on government programs. There is no trust." - george w bush

[Numbersguy1]

06:38 PM on 05/23/2011

This is such a phony statement. Yes, of course, some simpletons think that Social Security is like a trust fund. And Republicans love to push this idea in order to raise fear about it. The correct analogy is to treasury bonds. Doesn't the US government spend the money it obtains by selling bonds? Yes, of course! But repayment is backed by the full faith and credit of the USA. Isn't it absurd that that our government might feel bound to pay foreign governments interest and principal on bonds purchased, but should feel no such obligation to its own citizens, who have paid into the Social Security system in good faith? I'm not saying that there aren't cash flow problems, just that our citizens' trust in their government should be respected as much as any bond investor, not trivialized by stupid remarks such as gw's.

[tvhatic]

02:58 PM on 05/24/2011

Yes the surpluses were spent on other programs, but the SS fund has trillions in intergovernmental IOUs from the treasury. So although there is no “cash” sitting in some vault, there is the money there, much like if you had trillions in treasury bills sitting in a vault, they have value and will be paid.

SS can never go bankrupt unless we choose to stop it.

http://blogs.forbes.com/johntharvey/2011/04/08/why-social-security-cannot-go-bankrupt/

[Ruyur]

05:54 PM on 05/23/2011

High-frequency trading is the execution of computerized trading strategies characterized by brief position-holding periods, in many cases taking advantage from microstructure inefficiencies.

Flash trading is where certain market participants are allowed to see incoming orders to buy or sell securities very slightly earlier than the general market participants, typically 30 milliseconds, in exchange for a fee.

Latency Direct Market Access (ULLDMA) is a hot topic amongst Brokers and Technology vendors such as Goldman Sachs, Credit Suisse, and UBS. Typically, ULLDMA systems can currently handle high amounts of volume and boast round-trip order execution speeds (from hitting "transmit order" to receiving an acknowledgement) of 10 milliseconds and under.

And we are being advised to "buy and hold".

[John C75]

11:58 PM on 06/09/2011

Yeah I watched a news special on that. Just another way to siphon money out of the system. It's like gambling but they are counting cards.

[dizmo4]

04:25 PM on 05/23/2011

Ok, so let me get this straight.

Stocks Remain vulnerable to rising dollar and falling oil prices
Stocks remain vulnerable to falling dollar and rising oil prices
Stocks remain vulnerable to stagnant dollar


Seems to me that stocks are going to remain vulnerable to whatever conditions the analysis dreams up the night before.

[Republicanistan]

09:27 PM on 05/23/2011

Stocks remain vulnerable to whatever they want to tell you to help themselves. If they are telling you to buy, it's because they want to get out at the top. If they are telling you to sell, it makes a buying opportunity for them.

No one ever got rich sharing tips with the general public, they are sheep to be fleeced.

[lightningbolt]

03:55 PM on 05/23/2011

According to the Constitution, the currency must be controlled by Congress, not by corporations that control the Federal Reserve.

[lightningbolt]

03:55 PM on 05/23/2011

The banksters who own the Federal Reserve can easily manipulate the stock market simply by changing the value of the dollar.  The Federal Reserve's independence is unconstitutional, for a very good reason.