ChartWatchers

Weakening Dollar Boosts Large-cap Stocks

Arthur Hill

Arthur Hill

Chief Technical Strategist, TrendInvestorPro.com

The falling Dollar is boosting large-caps and they are outperforming small-caps. This makes sense because large-caps are typically multinational companies that derive a good portion of their revenue abroad. The Financial Times estimates that companies in the S&P 500 generate around 40% of their revenues abroad. These foreign earnings must be converted to Dollars and a strong Dollar translates into lower earnings. A weaker Dollar, on the other hand, helps the bottom line for companies that generate revenues abroad. 

Chartists can see this relationship in action by comparing large-cap performance against the Dollar. The first chart shows the S&P LargeCap 100 relative to the Russell 2000 using the price relative ($OEX:$RUT ratio). $OEX outperforms when this ratio rises and underperforms when this ratio falls. As the chart shows, large-caps underperformed small-caps as the Dollar rose from October to March. This performance ratio reversed in April and turned up as the Dollar turned lower. Notice that large-caps have been outperforming small-caps as the Dollar moved lower the last five weeks. 


 

The second chart shows the S&P LargeCap 100 hitting new highs on Thursday and Friday. $OEX was the first of the major stock indices to hit new highs in May and this confirms large-cap leadership right now. Note that the S&P 500 hit a new closing high on Friday. Large-cap outperformance is likely to persist as long as the Dollar weakens so chartists should keep an eye on the old greenback.   

Thanks for reading and have a great weekend!
Arthur Hill CMT

Arthur Hill
About the author: , CMT, is the Chief Technical Strategist at TrendInvestorPro.com. Focusing predominantly on US equities and ETFs, his systematic approach of identifying trend, finding signals within the trend, and setting key price levels has made him an esteemed market technician. Arthur has written articles for numerous financial publications including Barrons and Stocks & Commodities Magazine. In addition to his Chartered Market Technician (CMT) designation, he holds an MBA from the Cass Business School at City University in London. Learn More