The Dow Jones Industrial Average was slammed lower Tuesday to test key technical support near 18,000 due largely to a surge in the U.S. dollar. The PowerShares DB US Dollar Index Bullish (NYSEARCA:UUP) moved back over its 50-day moving average and is up nearly 5% from its mid-May low.
Because of its influence on commodity prices, a strong U.S. dollar weighs on futures prices; which in turn weighs on the stocks of related companies. Which means investors worried about a summer lull should be especially tuned in to this particular development.
For instance, crude oil (which is priced in dollars) fell 3.3% to finish at $58.03 a barrel, losing the $60 a barrel level that has been the dividing line between bulls and bears since late April. Energy stocks were the day’s laggards as a result, falling 1.6% as a group.
A strong dollar also is a net negative for stocks because of its negative impact on the value of foreign earnings — a big feature of 2014’s Q4 earnings season, as well as 2015’s Q1.
The catalyst for all this? A combination of renewed fears of a Greek debt default and possible exit from the eurozone (ahead of a June 5 deadline for a $1.8 billion payment to the International Monetary Fund), as well as a stronger-than-expected durable goods report that suggested the U.S. economy is revving back up after a winter slump — raising the odds the Federal Reserve raises interest rates sooner rather than later.
With these issues in play, the U.S. dollar appears set to continue flexing its muscles. And that puts a number of stocks at risk, including these five:
Stocks at Risk From a Strong U.S. Dollar: Exxon Mobil Corporation (XOM)
Exxon Mobil Corporation (NYSE:XOM) shares have sliced below their 50-day moving average in the first major downward cross since February as crude oil looks set for another bout of weakness on the greenback’s strength.
Analysts at Argus have worried for months that XOM — in an effort to grow reserves — could pursue an overpriced acquisition that would destroy shareholder value in a repeat of the XTO Energy deal in 2009.
I’m looking for shares to retest the March/April lows near $82 and $83 a share, which would be a roughly 4% decline from here — not an insignificant decline for this blue chip.
That’ll be good news for the June $87 put option positions that are already up more than 30% for Edge Pro subscribers since they were recommended on May 19.
Stocks at Risk From a Strong U.S. Dollar: Halliburton Company (HAL)
Oil services giant Halliburton Company (NYSE:HAL) looks set to break down out of its six-month uptrend off of its December lows. HAL stock has dropped back below its 50-day moving average and is testing recent support near $45. A breakdown here would put the March lows of $40 in play.
Halliburton, like its peers, is facing top-line revenue pressure and is responding with cost cutting measures and job reductions. The recent trend of operators drilling but not completing rigs — the so-called “fracklog” ready to produce — is likely to slow without a significant improvement in energy prices (and weakness in the dollar).
That would further pinch HAL to the benefit of Edge Pro subscribers holding June $46 HAL puts.
Stocks at Risk From a Strong U.S. Dollar: Chevron Corporation (CVX)
Chevron Corporation (NYSE:CVX) shares, like XOM, are drifting lower in a reversal of the gains seen as energy prices rebounded in April. Analysts at Goldman Sachs downgraded the stock on May 18; shares have struggled ever since. The reversal started on May 1, when CVX reported a bigger-than-expected 35.1% drop in quarterly earnings, weighed down its upstream business.
A return to the March low would only be worth a 3% drop, but could make CVX an attractive put option play in the June contracts.
Stocks at Risk From a Strong U.S. Dollar: Alcoa Inc (AA)
Dow component and aluminum maker Alcoa Inc (NYSE:AA) has collapsed more than 11% in May. The problem? A big wipeout in industrial metals prices with aluminum falling to test its March lows.
AA shares have followed the way down.
Alcoa reported disappointing revenues on April 9 as part of its quarterly results amid an ongoing oversupply situation. A strengthening dollar will worsen revenue pressures by weighing on prices.
Stocks at Risk From a Strong U.S. Dollar: Freeport-McMoRan Inc (FCX)
Copper and precious metals miner Freeport-McMoRan Inc (NYSE:FCX) is sitting at the epicenter of the strong dollar problem, exposed via the impact on gold and silver as well as metals like copper and cobalt.
FCX shares are at risk of breaking down out of a three-month uptrend out of its March lows, setting up a return to support near $18 — a 10% decline from here.