Strong Dollar Clamping Down on S&P 500

The S&P 500 remains tightly range-bound as the U.S. dollar soars

On Friday, it was a story of individual deals and a stronger dollar with only slight changes for the major indices.

However, Microsoft Corporation (NASDAQ:MSFT) jumped to a new closing high and was the Dow’s most active stock — rising 4.2%. And PayPal Holdings Inc (NASDAQ:PYPL) also hit a new high, up 10.1%.

FactSet, with about 25% of the S&P 500’s companies reporting, said that earnings are on a trend to decline 0.3% from a year ago. The technology sector is chiefly responsible for any gains and drove the Nasdaq’s gain for the week of 0.8%.

Financial shares also led other sectors, mainly because of anticipation of a short-term rate hike. The expectation of an increase was supported by FOMC Vice Chair William Dudley, who seemed to support a rate increase this year, saying, “It makes sense to me.”

The U.S. dollar rallied on Friday, up 0.2%, which had a negative impact on the euro (-0.4%), the British pound sterling, and a basket of 16 other currencies. The euro closed at $1.09 on Friday.

At the close, the Dow Jones Industrial Average fell 17 points at 18,146, the S&P 500 was unchanged at 2,141, the Nasdaq rose 16 points to close at 5,257 and the Russell 2000 fell 2 points to 1,218. The NYSE’s primary exchange traded 880 million shares with total volume of 3.4 billion shares. The Nasdaq crossed 1.6 billion shares. On the Big Board, advancers exceeded decliners by a small amount, but on the Nasdaq, decliners led by 1.2-to-1. Blocks on the NYSE increased slightly over Thursday.

S&P 500 trapped in Narrow Trading Zone
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I’ve highlighted this chart many times, however, note the high selling on the 500 on Thursday and Friday. This is indicative of a failure to successfully attack the overhead resistance at 2,145.

Why are the 500 and the DJIA, which has a similar failure to penetrate resistance, acting this way? The next chart provides the answer.

UUP lots of Buck Buyers
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The exchange-traded fund PowerShares DB US Dollar Index Bullish (NYSEARCA:UUP) traces the advance of the U.S. dollar. Technically it is “in the open” as chartists might say.

This month the dollar broke through resistance at the crucial 200-day moving average on a “Break-Away-Gap,” followed by two “Continuation Gaps.” For large-cap companies, this means that their products are more expensive and thus their exports will probably fall.

Conclusion: For small-caps who do most of their business in the U.S. and import many of their parts from overseas the strong dollar is a windfall. But as noted by the chart of the S&P, which can’t seem to make headway, 2017 may be a rougher year than first forecast.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

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