3 Trades For The Dollar Rebound

by: BubbleBustInvesting

After declining for more than two years, the dollar is turning around, gaining against every major currency, especially against the euro. Is it just noise or a genuine trend? It's hard to say but we do have some good indicators that suggest that the dollar may indeed be on an uptrend:

1. Moderate U.S. growth. Judging from recent data on retail sales, jobless claims, manufacturing orders, and consumer confidence, the U.S. is expected to grow at moderate rates in the near future, vis-à-vis Europe that is expected to remain flat at best.

3. Flight to quality. With sovereign debt issues persisting in Europe, the U.S. Treasuries continue to be the safe investment for foreign investors, also bullish for the dollar.

3. Monetary tightening in emerging countries may be over. Monetary tightening has begun to slow down inflation and economic growth in emerging markets, which is bearish for those currencies.

What does an uptrend for the dollar mean for financial markets?

While a stronger dollar may be beneficial for U.S. equities in the long-term, it is a negative for the overall market in the short term, as investors have begun to unwind long positions, especially the sectors that benefited from the falling dollar:

1. Sell Exporters. Stocks of major U.S. industrial and technology companies that draw a great deal of their sales from overseas are also vulnerable to a stronger dollar. Caterpillar (CAT), for instance, lost 3 percent on Monday’s early trade; Cisco Systems (CSCO) lost 2.41 percent; Intel (INTC) 4 percent (the company lowered its guidance); and Applied Materials (AMAT) 5.15 percent.

2. Sell Precious Metals. For more than two years, precious metals had everything going their way: ultra-accommodating monetary and fiscal policy, a falling dollar, a growing world economy, inflationary expectations, and soaring sovereign debt. Ishares silver trust (SLV) is up 250 percent since early 2009; SPDR Gold Shares (GLD) is up 100 percent; and Freeport-McMoRan Copper and Gold (FCX) soared 200 percent.

3. Buy domestically oriented companies like homebuilders Lennar (NYSE:LEN.B), Toll Brothers (TOL) and D R Horton (DHI) and health care stocks like Aetna (AET), and Cigna (CI).

Disclosure: I am long INTC, LEN, DHI, TOL, AET, AMAT, CSCO. I'm short on SLV. Active trader. May switch positions at any time.