Catch a ride on the U.S. dollar bull

GETTING TECHNICAL It’s good news for Canadian exporters, as well as those U.S. stocks in your portfolio, writes Bill Carrigan

he big “shock” last week

was the 14 per cent plunge ($ 5.50, to $ 33.91) in the shares of luxury-home builder Toll Brothers Inc. after the company warned new home deliveries and earnings for next year would probably fall short of its forecast. The slide in Toll Brothers’ shares helped push the Dow Jones U. S. Home Construction Index down 7.4 per cent, the largest percentage drop in three years. The NYSE- listed Toll Brothers warned that the era of rocketing home prices appeared to have ended. Americans have been shaken by recent hurricanes and spiking energy prices, and many are putting off buying new houses. Wow, are we to believe that, in one day, we all get the same information and we all come to

Tthe same conclusion? Are we all to believe the so- called “ Housing Bubble” burst last Tuesday? Aquick look at the chart of Toll Brothers tells us the real story.

Toll peaked at $ 58.57 on July 20, 2005, and 12 trading days later — Aug. 5 — posted a bearish Breakaway Gap to the downside to close at $ 50.95, just under the 50- day moving average. On Oct. 4, the price dove under the important 200- day moving average to close at $ 41.40. The reality is, last week’s “ surprise” drop in housing stocks is very old news. The real culprit is the run- up in U. S. interest rates. Since early July the yield on the 10- year note has run up from under 4 per cent to over 4.60 per cent. The U. S. Fed is tightening.

Last week I sold my position in Goldcorp Inc. after it reported a whopping 470 per cent jump in third- quarter profit on Tuesday, benefiting from a dramatic fall in costs and higher gold sales thanks to its Wheaton River acquisition.

I fear the effects of a strong U. S. dollar more than I fear not owning a stock with a “ great story.” The run- up in bond yields is also providing a boost for the U. S. dollar and a strong dollar could cap the gold rally for several weeks. Our chart this week plots the monthly closes of the U. S. Dollar Index. Just as the Dow Jones Industrial Average provides a general indication of the value of the U. S. stock market, the U. S. Dollar Index provides a general indication of the international value of the U. S. dollar. The longer-term strength or weakness of the dollar can impact your investments in several ways, so it is important to position your investments in accordance with the current dollar trend. The dollar peak of late 2001 and subsequent decline through 2004 was a factor in rising commodity prices, including gold, copper and their related stock groups. The U. S. dollar slide also reduced your returns on U. S. equities relative to local equity investments in Canadian dollars. The inverse head and shoulders bottom in our chart signals a trend reversal. The H&S bottom is a well-known reversal pattern marked by three (or more) prominent troughs with a middle trough ( the head) that’s lower than the other troughs ( the shoulders). When the trendline (neckline) connecting the peaks at the top of the pattern is broken, the pattern is complete.

In the case of the dollar, a break above the neckline would constitute a second up leg ( or 3rd wave) advance. This advance is notable in that it has several characteristics as described by R. N. Elliott of Elliott Wave fame. When applied to the capital markets, the 3rd wave advance will be of strong breadth with powerful momentum and high trading volume. In many cases, the fundamentals improve and investor psychology changes from negative and bearish to positive and bullish. Have you noticed the change in investor psychology toward the U. S. dollar? It is only recently that many market participants ( including Warren Buffett) have come to recognize the reality of U. S. dollar bull, which is actually entering its 12th month.

Arecent headline in a business daily proclaimed, “ Euro smoulders as France burns.” I recall it was only 11 months ago that we all loved to love the euro and we all loved the hate the U. S. dollar.

There is speculation the civil unrest in France could spread, and that makes it less likely the European Central Bank will raise interest rates. Now, don’t forget, the Fed is tightening, and that, along with strong U.S. growth, will drive the dollar higher. AU. S. dollar bull will put a temporary lid in rising commodity prices such as gold and crude. AU. S. dollar bull will be a positive for Canadian exporters, as well as for those U. S. stocks in your portfolio. Bill Carrigan is an independent stockmarket analyst. His Getting Technical column appears Sunday. He can be reached at www.gettingtechnical.com on the Internet.