- Analytical Commentary -

February 17, 2010 (FinancialWire) (By Dr. Joe Duarte) — The S&P 500 SPDR ETF (NYSE: SPY) rallied on Tuesday, as dollar sensitive stocks Johnson & Johnson (NYSE: JNJ) and 3-M (NYSE: MMM) may be telling us that the dollar rally may have seen a short-term top.

First, the S&P 500 closed just below 1100, a key resistance level, which means that buyers and sellers may be waiting right above the chart point. If the sellers win, the rally will fail. If the buyers win, then we should see more gains in the index. What that means is that investors need to be paying special attention to that key chart point.

So far, the S&P has moved above its 20-day moving average. That means that the short-term trend is now up. That could easily change, so it’s not as meaningful a gauge at the moment. More important is what happens at the 50-day moving average, the dividing line that defines the intermediate term trend, the direction that stocks are likely to take over the next several weeks to perhaps month. That line is just about at 1100, which makes that chart point doubly important, on its own, and also as the measuring gauge for the intermediate term trend.

Now, the dollar issue becomes important. Large multinational companies such as Johnson & Johnson and 3-M make more money when the dollar is low in value. Their overseas sales rise as American goods, due to the lower dollar are cheaper in overseas markets. Also important is the effect of the lower dollar when companies bring money back to the U.S. as earnings rise. Both stocks went up on Tuesday, as the dollar went down, just as you would expect.

This is not very surprising though, as even though the dollar has been rallying lately lately, due to Greece’s problems, shares of U.S. companies that rely on global sales for a significant portion of their earnings have been steady. That means that some in the market have been expecting the dollar rally to moderate in the short to intermediate term.

Looking back, we also saw that when the dollar’s rally picked up steam in January, both JNJ and MMM rolled over. But over the last few days both stocks have started to consolidate. This has coincided with a slight stall in the dollar. Over the weekend, as the E.U. has agreed to give Greece a month to get its fiscal house in order, the relationship between the large U.S. exporters, such as JNJ and MMM seems to have resumed, as a lower dollar has boosted the shares of companies that make more money with a weaker dollar.

If these two stocks and others in the Dow Jones Industrial average start to sag, especially if the dollar picks up steam, it will be a signal that the rally in the dollar is likely to resume. On Tuesday, that was not the case. If you are an investor in the dollar, this is an opportunity to consider taking some profits or make sure that your time frame for holding on to dollar investments is for a fairly long period of time.

[Go to http://www.financialwire.net/?s=joe+duarte to see more commentaries by Dr. Joe Duarte.]

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