Bespoke has a nice post on the impact of US Dollar’s depreciation on earnings of US companies… this is a very simple yet very applied example of the CFA Level 2 reading on Multinational Operations.
The US dollar index (trade weighted measure against other currencies) is down about 3% in 2011. How does this affect earnings of US companies? US companies can be broadly classified in to two categories: those that do 100% of business is in US and in USD and those that do a significant share of their business globally… it is the second category of companies that are most affected by currency fluctuation…
Source: Bespoke Investment Group
How does USD depreciation affect stocks?
When the dollar is rising, US companies that do most or all of their business within our borders stand to benefit, while US companies with large amounts of revenues outside of the country lose out. The opposite occurs when the dollar is declining — companies with large amounts of international revenues benefit at the expense of the domestics.
If the above is not intuitive, visit my earlier post here.
As shown in the second chart below, the average YTD performance of stocks in the decile with the largest percentage of international revenues is 7.68%, which is by far the best performing decile. The average YTD performance for stocks with no international revenues is 3.09%. This performance is inline with what one would expect given the dollar’s decline.
Loosely speaking, about 3-4% of the 7.68% rise in the top performing decile can be attributed to currency depreciation and the rest to the general market rise…
Going forward, if you expect the dollar to continue its decline, the stocks with large amounts of international revenues should continue to outperform. If you expect the dollar to reverse course and head higher, the stocks with little or no international revenues should start to pick up.
…
Source: Bespoke Investment Group
A quick update on the technical picture, highlighting major support and resistance levels.
Currencies are grabbing headlines these days thanks to constant tug-of-war in the race to the bottom. Japan announced quantitative easing today. Last week, the US Fed signalled another round of QE and Bank of England has maintained its QE stance.
With that, here is a technical picture of the US Dollar… the rather ominous death cross on the USD doesn’t bode well for its trading partners and is probably in anticipation of QE2 measures leading to downward dollar spiral.
The recent US dollar sell-off was rather quite fast and the chart now signals a recovery from the oversold conditions…The recent sell-off in USD is good news for equity markets… S&P 500 is breaking above the 1150 mark today… finally, after trying everyday for the last 7 trading sessions.
The 50 day SMA is trending upwards and could cross the 200 SMA before the end of 2010 giving the all clear Golden cross.
One caveat is that the September rally wasn’t accompanied with increase in volume but then again the average volume relative to prior years has been low in 2010.
A quick update on market charts… given the recent correlation it is not surprising to notice that major markets are either at key support or resistance levels… here is a summary of the major markets
(Note: Red arrow indicates resistance & Green support)
S&P 500 – can it hold the 200 day moving average?
CRB – Commodites Index – 6 month high… Nearing Golden Cross (50 day moving average crossing the 200 day moving average from below)?
USD Dollar – will it hold the 200 day support? It did in early August but it is also closer to the Death Cross (converse of Golden cross)
TSX – 125 points shy of the 52-week high, RSI approaching 70 and imminent golden cross signal
Fear – doesn’t matter how hard the double-dip camp tries, VIX hasn’t broken the downtrend line from mid-May but it is also resting at key support level of 20
I’m curious to see which side wins…I’m still biased to the downside given the fundamental picture.
Why?
Triple resistance ahead… look at the chart below.
Source: stockcharts.com
S&P 500 Index is approaching strong resistance in the current area…
- First & foremost, the 1100 psychological barrier… look at the last quarter of 2009 from Oct-Dec, the index tried to breach the 1100 level 5 times before breaking through at the end of December
- We are 15 points away from the 200 day moving average at 1115
- And lastly we are approaching the Downtrend trend line from May 2010 highs
S&P 500 – technically doesn’t look good… fundamental bias to the downside after today’s unemployment claims
TSX – not so bad, holding support at crucial averages (50 & 200 day)
0.000000
0.000000
If you haven’t heard:
Wheat prices are at a 2-year high… up 50+% in July alone!… which has undoubtedly taken fertilizer stocks (POT, AGU, MOS, etc) higher by ~25%
Source: stockcharts.com
CRB – the ubiquitous commodities barometer is at a 7-month high – battling strong resistance
Source: stockcharts.com
Baltic Dry Index has turned up 10%
VIX is below the 200 day moving average
Source: stockcharts.com
S&P 500 is trying to hang on to crucial support at 200 day moving average…
Source: stockcharts.com
US Dollar index is barely hanging in at the 200 day moving average
Source: stockcharts.com
Oh and lastly… the Shanghai stock market as a leading indicator of leading indicators… what a joke!
What does this all mean? The next days/weeks are crucial to get a sense of market direction… i think markets are at an inflection point and could either way from here… tighten your belts!
0.000000
0.000000
The TSX is awefully close to a Death cross signal (50 day simple moving average crossing the 200 day moving average from above i.e. 50 day average is less than 200 day average)…
I think we are bound to get a death cross within the next week… the TSX is about 300 points away to signal the death cross as of yesterday’s close.
Source: stockcharts.com
How good is the Death Cross signal? To answer this I looked at all the historical data I could get and analyzed the returns based on Short Selling at close on the day of Death Cross and covering and going Long at the next Golden cross (50 day SMA crosses 200 day SMA from below)
I understand 10 years is a small sample but it is better than nothing 
If you only traded on the Death Cross & Golden Cross from the first signal in Nov 2000 you would be way ahead of the market for the analyzed period analyzed… hell, you would be better off just going long and sitting out until a Golden cross is recognized!
On the other hand, the Death Cross is only good half the time where as the golden cross is only good 4 out of 10 times BUT provides a better return than the death cross…
|
|
24-Nov-2000 |
15-Jul-2010 |
|
Total |
Death Cross |
Golden Cross |
|
|
Short Trade |
Long Trade |
| Total Trades |
11 |
6 |
5 |
| Winning Trades |
5 |
3 |
2 |
| % Winning Trades |
45% |
50% |
40% |
|
|
|
|
| Largest Winning Trade |
56.8% |
20.5% |
56.8% |
| Largest Losing Trade |
-7.7% |
-7.1% |
-7.7% |
|
|
|
|
| Cumulative Compounded Return |
125.0% |
25.8% |
78.9% |
| $1000 = |
2,249.82 |
1,257.75 |
1,788.77 |
| Buy & Hold Return |
30% |
|
|
| $1000 = |
1,301.11 |
|
|
(If you know where I can get historical data beyond 2000, please let me know)
For more information on Death Cross & Golden cross check out:
http://cssanalytics.wordpress.com/2010/07/08/death-cross-short-strategy-on-sp500-its-best-to-exit-early-versus-waiting-for-a-golden-cross/#comments
http://ibankcoin.com/woodshedderblog/2010/07/01/what-you-need-to-know-about-the-death-cross/
0.000000
0.000000
Tags: charts, death cross, golden cross, quantitative analysis, S&P TSX, S&P500, statistics, stocks, technical analysis, toronto, tsx
Commodities are higher today even when the Baltic Dry Index is poised to post a 7th consective weekly decline totaling 50+%… the last time BDI declined for 7 consective weeks was from Sep 09 to Oct 09 for a massive 86% drop… prior to that drop the BDI declined for 9 consecutive weeks for 44% decline!… Is the current drop a prelude to a bigger this Fall?
Source: stockcharts.com
This chart shows negative divergence between the BDI and CRB Commodities Index… the BDI is considered a leading indicator and hence the Commodities index should follow the BDI… are commodities meant to go down?
Source: stockcharts.com
0.000000
0.000000
David Rosenberg sheds some light from a quantitative perspective in this AM’s report …
When we go to the weekly data from the Fed, we see that “trading assets” on commercial bank balance sheets expanded to $325 billion in the past two weeks from $297 billion. And, when we go to the Commitment of Traders report, we see that there has been a big swing in the net speculation position on the S&P 500 “E-minis” on the Mercantile Exchange (futures and options) to a net long position of 28,172 contracts from 15,155 net shorts just two weeks ago. That’s a big part of the bounce-back — prop traders and short-coverings. Nothing fundamental here, as far as we can see.
S&P 500 is up 1+% on increasing trade deficit & successful sale of Greek bonds…
0.000000
0.000000
Recent Comments