Don’t Fret a Downed Dollar: Shifting Trends Favor These Sectors

Shifting trends in sectors and asset classes are a serious matter, with changes in single sectors often going on to affect entirely different veins of the market – and even the market as a whole. We saw this during the summer, when the “Magnificent 7” mega-caps were drastically overweighted and constantly in the news; if even one of those stocks had a poor day, the whole S&P 500 took it on the nose.

Right now, market headlines have been dominated by talk of rate cuts – with both the U.S. Federal Reserve and the People’s Bank of China under the spotlight over the last month. When a nation’s interest rates decline, that country’s currency tends to weaken as a result. That’s because investors are getting paid less interest for holding money in that currency.

There’s been weakness in the U.S. Dollar Index recently – and it’s already having an impact beyond the world of currency markets.

But the buck’s troubles didn’t start with the Fed’s rate cut last month. The U.S. dollar has been struggling since last year, as you can see below:

In fact, the U.S. Dollar Currency Index (DXY) triggered an alert last December when it fell into our TradeSmith Health Indicator Red Zone. And following a brief rally earlier this year, the greenback has rolled over yet again, breaking below its Smart Moving Average – which signals a confirmed downtrend.

To add insult to injury, our Trade Cycles indicators also forecast more downside for the dollar coming on the horizon. Our Composite timing cycle, shown in purple above, recently peaked… and it’s indicating a downtrend continuing into early 2025. That’s worth keeping in mind.

Granted, a weaker dollar does make sense economically: The Fed just lowered interest rates for the first time in four years – and the rate-cutting cycle is expected to continue into 2025, with at least one more cut forecasted before the end of this year.

Lower interest rates tend to weaken the currency, so the dollar should get weaker from here based on the historical data.

With that in mind, the question for forward-thinking investors is this: Which assets stand to benefit from a weaker dollar?

When the Dollar Drops, Commodities Cash In

Commodities may be the biggest beneficiary of all. It’s pretty well established that commodity prices tend to rise when the dollar falls, and vice-versa.

It makes sense when you think about it: Most major global commodities are priced in U.S. dollars. So, when the dollar is trending down, it makes commodities more affordable for international buyers. Commodity prices move higher as a result.

And for commodity producers outside of the U.S., a weaker dollar boosts their bottom line – because a weaker dollar gives them the ability to raise prices and earn bigger profits.

Analysts at SentimenTrader found that by investing in commodities only when the dollar was trending down, the resulting returns were 14 times greater than those earned by owning commodities while the dollar was in an uptrend:

With commodities set to thrive, there’s one trade that comes to the top of my mind: That’s the Invesco DB Commodity Index ETF (DBC), a fund that holds a broad basket of commodities.

In theory, this ETF could provide an easy option for those looking to take advantage of this developing opportunity. Looking back as far as 2006, if you invested in DBC only when the dollar was in a downtrend, every $100 put into the ETF could have returned $372 in hypothetical profits!

And if you prefer individual stocks to ETFs, another good way to take advantage of a dollar downtrend is to own U.S. stocks that do big business internationally.

When big U.S. multinational companies make a significant share of their sales in international markets, the profits they book each quarter get an added boost when converting those strong overseas sales back into a weaker dollar. That leads to more impressive earnings results – and often, rewards from the market if those results beat estimates.

So, we’ve now identified two good ways to take advantage of a downtrend in the dollar:

1. We can buy stocks and ETFs that produce or hold commodities, and…
2. We can focus on stocks and sectors that do big business internationally.

Sometimes, these two strategies can overlap. Here are the top five U.S. stock sectors sorted by percentage of international sales:

Two of these top sectors – Materials and Energy – are commodity producers. And these two sectors stand to earn double the benefits from a weaker dollar.

The other three sectors on our list sell a lot of goods and services overseas. For Technology, 59% of the sector’s total sales come from international markets. And the Industrial and Communication Services sectors both earn roughly one-third of their sales from international customers.

Right now could be a great time to put your cash to work by focusing on stocks found in these sectors. Here’s how to identify the best bets of the bunch, as determined by our TradeSmith indicators:

To set up this screener for yourself, log into your TradeSmith Finance dashboard, then select Invest from the top navigation bar. Once you’re on the new page, select Screener from the white menu bar. Then, select the green + Create new screener button.

Finally, click + Manage Filters to add the filters above to your Screener, plus any additional filters you may want to include. From the list of TradeSmith indicators, add filters for Trend, TradeSmith Strategies, and Business Quality Score (BQS). And from the list of General filters, add the filter for Sectors.

Here’s why I chose these filters for this search:

First, we want to focus exclusively on the sectors that can benefit from a weaker dollar. So, I used the Sectors filter to select the top five sectors by percentage of international sales: Tech, Materials, Energy, Industrials, and Communications Services.

Second, with the dollar in a downtrend these stocks should be trending up already. If not, I’d skip them. We can make sure we’re only looking at stocks in an uptrend by setting the Trend filter to Up.

Third, I only want to see the best stocks from these best-performing sectors. So, from the TradeSmith Strategies dropdown menu, click on Ideas Lab, then choose Sector Selects. For this search, we don’t need to filter our search by a set number of days.

Finally, I include Business Quality Score (BQS) as a measure in almost every screen that I run – because I want to focus on quality businesses and eliminate junk stocks from my search. So, I set the filter to more than 75, which gives me only the top 25% of stocks by quality.

With the screener set and ready, I sort my results by BQS descending and click the green Run Screener button to see the results.

NOTE: And if you don’t currently have access to our TradeSmith Screener tool, or any of the filters I used in this search, in your TradeSmith Finance platform – and would like to – call 888-623-0858 to discuss how to add them.

When I ran this screen earlier today, I got 40 results in total. Here are the top 10:

Interestingly, this list is dominated by technology and industrial stocks. Only two stocks from the materials sector made the top 10: Ball Corp. (BALL) and Sherwin-Williams (SHW). And there were no energy stocks on the list at all.

That’s probably because the energy sector hasn’t been performing well recently, so it doesn’t make our Sector Select list. But that doesn’t mean energy won’t make a big comeback: Oil is already moving higher amid the U.S. dollar’s weakness. So, we can try running the screen again without the Sector Selects filter to find some more energy stocks – and save this Screener for review later, in case energy makes a comeback in the next few months.

Mike Burnick’s Bottom Line: Be sure to keep a close eye on the trends moving markets outside of stocks, like the developments we’re seeing in currencies, bonds, and commodities. They can provide valuable clues about which stocks and sectors have the potential to outperform in the days ahead. For example, commodities and the stocks of companies that produce them should perform well with a down-trending dollar. And the same is true for big U.S. stocks that earn a high percentage of sales from international markets.

Good investing,

Mike Burnick
Senior Analyst, TradeSmith

P.S. Stocks in the Technology sector are poised to benefit from a weakening U.S. dollar – and there’s one opportunity in the sector you won’t want to miss.

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