Among economists, there is disagreement about the importance of a strong U.S. dollar. A weaker dollar makes U.S. goods and services more affordable and attractive in the international market. That is generally good for business and for the stock market. That same weaker dollar, however, is less attractive to foreign investors who buy bonds to fund U.S. debt.

There can be no real argument, though, that a strong dollar is good for American consumers. A strong dollar means consumers’ money goes further. A good example is the price of oil. It is no coincidence that the recent rally in the dollar occurred at the same time as a downturn in world oil prices. A few weeks ago, we wrote about the high inverse correlation between oil and the dollar.

For the past few weeks, the dollar has gained strength and made advances against the Euro and other currencies. Currently analysts seem to be divided about whether the dollar will continue to rise or will resume the longer-term decline. The chart below shows price movements of the dollar over the past three years. I added the red line to show what has become a key area of support or resistance.

If the dollar can break above the level indicated by the red line that should become a new support area and we could see a more sustained rally lasting several more weeks or months. If the dollar fails to break that level then a resumption of the downtrend is likely. Right now it appears that the dollar is rolling over and weakening and it seems likely that its value will continue to erode.

Earlier this week the United Nations released a report that warned about a potential crisis of confidence in the dollar that could even lead to a collapse if its value against other currencies continued to decline. Globally, the U.S. dollar is a highly desired currency. Compared to many currencies, it retains it value and experiences less volatility. I used to do a lot of business with companies overseas. Most of those companies preferred payment in U.S. dollars rather than in their own country’s currency.

The United Nations report noted that the dollar exchange rate when compared to a basket of other key currencies has reached its lowest level since the 1970s. That’s bad news for foreign firms and nations that have stockpiled dollars. The danger comes when those dollar investors decide to cut their losses and start cashing in their dollars. A massive sell-off would prompt a further slide in the value of the dollar, which would lead to additional selling, etc. It would be very similar to what occurs during a run on a bank.

Such a situation would have a devastating impact on U.S. consumers. As the value of the dollar fell, the prices of goods would rise dramatically. Because two-thirds of U.S. GDP comes from consumer spending, the overall impact on the economy would also be extremely damaging. This would be a situation that no one wants to occur and the U.S. government will do all that it can to prevent such a situation. Chances of this occurring are probably not very great. But obviously there is enough of a concern that the United Nations believed it needed to be included in its report.

Even if the value of the dollar does not collapse, its continual decline is not a good thing for U.S. consumers or for foreigners who have invested in the U.S.

Flint Stephens

A Wall Street adage says, “There is always a bull market somewhere.” Whether or not that is true depends at least partially on the period one is considering. In recent weeks, it has been difficult to identify any clear bull markets.

One key to finding those bull market opportunities is to have a selection set that includes non-correlated asset classes. Traditional asset allocation models break asset classes into categories like large cap stocks, small cap stocks, value stocks, international stocks, etc. The problem with that type of diversification is that those asset classes tend to be highly correlated. In other words, there usually isn’t much diversification among small cap stocks and value stocks, for example.

As a way to help find the elusive bull markets, Strategis looks at ETFs in five diverse sectors. These include U.S. stocks, represented by the S&P 500 (SPX); real estate, using IYR; international stocks represented by EFA; gold (GLD); and long-term U.S. Treasury bonds (TLT). Based on our own research and experience, these five asset classes have low correlation and offer investors an opportunity for real diversity.

The chart below shows the price movements of these ETFs over the past six months. While all have positive gains over that period, the picture for May is muddled. The only one of the five that has advanced in May is TLT. And it is ahead by less than 2% and has the worst performance over the six-month time frame.

The dilemma for investors is that none of these sectors looks promising at this point. In spite of the recent weakness, all but TLT remain in long-term advances. TLT has been the strongest over the past seven or eight weeks, but over a longer term, it has been the weakest of the group.

Seasonally, stocks are entering the historically weak summer season. That also makes it difficult to get excited about financial markets that seem to be going nowhere.  The good news is that based on experience these periods where everything seems to be in the doldrums usually do not last more than a few weeks. Then one sector or another will find strength and we will be able to make some better assessments about which direction the markets are likely to move.

In spite of advances by most market sectors over the past year, the U.S. economy remains fragile. The housing sector has not recovered as quickly as some have forecasted. Unemployment remains at an unacceptably high level. High fuel prices are fueling inflation. Plenty of global uncertainty remains as well—from unrest in the Middle East to European and U.S. debt issues.

It would not be surprising to see stocks continue to struggle in a sideways pattern throughout the next several weeks and possibly all summer. In the meantime investors need to watch closely, because unexpected events could cause sharp whipsaws in various sectors.

Flint Stephens

An old market adage says, “Sell in May and go away.”  Based on the adage, the May-October period is not a good one for investors and the best thing they can do is to move to the sidelines and wait to reinvest in November. According to Wikipedia, this is a variant of the Halloween indicator: “the belief that the period from November to April inclusive has significantly stronger growth on average than the other months.”

Whether or not the adage is valid has been a topic for debate for many years and no conclusive results have been proven. Certainly, there are years (like 2010) when such a strategy would be effective. Last year stocks slid in May and struggled to find their footing until they began a sharp climb in September. It already seems unlikely that 2011 will follow a similar pattern. The first two weeks of May are over and so far there hasn’t been a significant sell off in stocks. There also haven’t been any gains.

As the chart below shows, the S&P 500 and other major indices have failed to make any real headway since February. I added the blue line to help illustrate this point. And technical indicators are not providing much helpful information about which direction stocks are headed next.

The middle portion of the chart is a moving average convergence divergence (MACD). Like the index it tracks, the MACD is generally moving sideways at a level that is neither overbought nor oversold. In other words, the next move is anyone’s guess. The bottom portion of the chart is a stochastic oscillator. It also seems stuck mid-range, offering no real predictive information.

The summer months are often a slow period for the financial markets. It is s time when people are taking vacations and their focus can be diverted from investing. But the markets are still subject to internal and external forces that can impact investor sentiment and market direction. If a major event occurs in July, investors will still react.

Although technical indicators are not giving us much to go on right now, the long-term advance remains intact. Another Wall Street adage whose value is undisputed is “the trend is your friend.” So in the absence of any information to the contrary, for the time being investors should not be unduly concerned about a major market meltdown.

Flint Stephens

In recent days, gold and silver demonstrated why they have a reputation as risky investments for many investors. Gold has climbed steadily since the latter months of 2008. It is up more than 100% over that period. While there have been some flat periods and a few pullbacks, the rise has been consistent as it reached new all-time price highs many times along the way.

With the economy continuing to struggle, many investors were persuaded that gold is a secure bet in an uncertain financial arena. While the long-term security of gold might be debated at times, its history of volatile price moves is undeniable. Compared to many past corrections in gold, this week’s drop of about 6% is fairly mild. But for conservative investors, a fall of that magnitude in just a few days can be quite harmful. Still, a look at some technical indicators for gold shows that as yet there is no reason to panic.

Below is a chart of SPDR Gold Trust (GLD). The gold line on the top portion of the chart is a 50-day moving average (MA). Notice that even after the sharp price drop this week, GLD remains well above its 50-day MA.

The middle portion of the chart is a moving average convergence divergence. While it crossed over and turned downward this week, it remains in positive territory. The bottom section of the chart is a stochastic oscillator. It has reached an oversold level indicating that an upward price move is likely. When judged by these indicators, the long-term upward trend in gold remains intact. For investors holding gold, this is not the time to panic. In addition, there hasn’t been a dramatic shift in economic fundamentals that would prompt a wholesale exodus from precious metals positions.

While price moves in gold and silver tend to be highly correlated, for several months silver has been much more volatile than gold. Like gold, silver has been in a steady advance since late in 2008. However, silver rose more than 400% before peaking a few days ago. The sell-off in silver has also been more dramatic with a decline of about 25% in less than a week. These types of volatile price swings illustrate why investors must show extreme caution when dabbling in the precious metals markets.

For investors holding gold or silver, the past few sessions have likely been unsettling. For the time being, though, there is no compelling evidence that the recent slide is anything more than a normal  corrective move after a strong advance.

Flint Stephens