Could the Strong Dollar Hurt the S&P 500?

Could the Strong Dollar Hurt the S&P 500?

Stock markets continue to push forward in their rallies for 2015 but with valuations trading at such elevated levels it is important for investors to assess possible factors that could start to reverse the trend.  One factor that has started to receive more attention is the stronger US Dollar, which is now trading at its highest levels in nearly 15 years.  Most of the concern for stock markets stems from the fact that major benchmarks like the S&P 500 are composed of companies with heavy international exposure.  Consumers in those countries will likely find it more difficult to purchase products from the United States as long as the Dollar continues to trend strongly.

This does not necessarily mean that we will see major reversals in the S&P 500 but it is an important factor to consider as we start to move toward the halfway point in 2015.  To get a better sense of how the S&P 500 is performing, we will look at a recent price history in the SPDR S&P 500 Trust ETF (NYSE: SPY), which is the most commonly traded ETF tracking the index.  Closely monitoring the SPY ETF is one of the best ways of spotting potential weakness that might arise.  Those looking to start establishing new positions in any of the major stock benchmarks will likely find the analysis beneficial given the fact that the S&P 500 is still trading within striking distance of its all-time highs.

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SPDR S&P 500 Trust ETF (NYSE: SPY)

(Chart Source:  CornerTrader)

From just about every possible perspective, the S&P 500 and the ETFs most closely tied to the index are still in the midst of a historic uptrend.  “So far this year, price activity in the S&P 500 has been positive and the benchmark is now trading back toward the highs near 2,120,” said Jenifer Osterwalder, President/CEO of Spectral Capital.  “As long as these types of moves continue, the S&P will likely remain a focal point in the financial news media.”  This is an important environment for investors to consider because assets that receive the most media attention tend to be the ones that are initially considered by new investors.  

From a support and resistance perspective, the uptrend in the S&P 500 will remain valid unless support in the 2040 area is broken.  If this occurs, many long investors will likely start to consider taking profits in equities as long as prices are still elevated.  Any time we start to see surges in profit taking, asset prices will start to move back toward their historical averages.  So, from a chart perspective, the long term trends in the S&P 500 continue.  But any price moves back below the 2040 would light a warning signal that should be watched by those that are entering into the market near the highs.  

From a fundamental perspective, investors will need to watch for evidence that the strong US Dollar is starting to weigh on the earnings outlook for companies that might be vulnerable to changes in foreign markets.  If this does occur, the important price support at 2040 could start to come under pressure.  If not, there is little in the way of the the S&P 500 on its approach to new highs for the year.  It should be remembered that yearly highs are also record highs at this stage, so any upward activity in the benchmark is significant.  

Going forward, these are some of the issues that long investors will need to contend with before entering into new positions for the world’s largest stock benchmark.  The S&P tends to be used as a leading indicator for what is likely to happen in the other stock benchmarks (both in the US and around the world).  So any developments here will continue to be important both for investors in SPY and for investors that have taken exposure in other regional stock benchmarks elsewhere around the world.