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Here Is The Problem With This Rally In The DJIA

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March 14, 2013 – Comments (0)

Every talking head on the financial news networks are celebrating the new all time closing high on the Dow Jones Industrial Average (DJIA). Last week, the DJIA crossed above the 14,198.00 level that was last made in October 2007. Today, the DJIA is trading as high as 14,515.00 which would be another new closing high on the DJIA. Many analysts and Dow Theory followers are looking for much higher levels on the DJIA. So what are the problems with this rally if everyone is so bullish at this time?

The first and biggest problem with this rally in the DJIA is that it has occurred on the back of a stronger U.S. Dollar. If traders and investors look back at recent history the stronger U.S. Dollar Index (DX) will usually hurt corporate profits for the multi-national companies. The DJIA is made up of all multi-national companies. Over the past twelve years the stocks that make up the DJIA have actually rallied because they can sell more goods abroad with a weak U.S. Dollar. If traders and investors look at a long term chart of the U.S. Dollar Index futures (DX) they will see that every time the U.S. Dollar surged for more than a couple of months that is when a sharp correction occurred. If companies cannot increase their exports then their profits will decline. It's just that simple, you sell more product abroad with a weak currency. The U.S. consumer can only carry these companies so far. Can stocks such as Procter & Gamble Co (NYSE:PG), Hewlett-Packard Co (NYSE:HPQ), and International Business Machines Corp (NYSE:IBM) sell more goods abroad (exports) if the U.S. dollar Index continues to strengthen? I seriously doubt it.

Every country in the world is now devaluing there currency to try and boost their exports. Has anyone looked at a chart of the Japanese Yen recently? The Japanese Yen has been plunging lower against every major currency in the world these days and that has helped the Nikkei 225 Index to rise to new 52 week highs. This money printing is not going on by just the Japanese, it is occurring in the United States, European Union, England, India, China, Zimbabwe, and almost every other fiat currency nation in the world. In other words, the race is on by almost every country to devalue their currency faster than the next country to boost exports.

The U.S. Dollar Index futures (DX-M3) have been rising on the back of better economic data in the United States. There is also more money printing taking place in the other countries and that is forcing traders and investors to buy U.S. Dollars. The next factor for why the U.S. Dollar Index is rising is because the U.S. Dollar is the world's reserve currency. For example, if you are trying to buy a barrel of oil in Japan you must convert Japanese Yen into U.S. Dollars in order to buy that barrel. Most commodities trade in U.S. Dollars so there is always going to be some demand for dollars by other countries. Either way, the strong U.S. Dollar is going to hurt the multi-national corporations in the DJIA. During the next earnings season this will be evident. This is the biggest problem with this current rally in the DJIA.

Nick Santiago
InTheMoneyStocks.com

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