BANKS, ENERGY, AND SMALL CAPS TEST 200-DAY LINES -- DOLLAR HITS TWO-YEAR HIGH AS EURO WEAKENS -- THE RISING DOLLAR IS PUSHING GOLD MINERS LOWER -- WISDOM TREE EUROPE HEDGED EQUITY FUND COMPENSATES FOR WEAKER EURO

BANKS, ENERGY, AND SMALL CAPS STRUGGLE WITH THEIR 200-DAY LINES... Three stock groups are still struggling to clear their 200-day lines. Chart 1 shows the KBW Bank Index sitting just below its red line. Lower bond yields today may be holding it back. But the Financial Sector SPDR (XLF) has already cleared its red line, as have most groups in the XLF. Chart 2 shows the Energy Sector SPDR (XLE) also trading right at its 200-day line. The fact that the price of oil has already cleared that barrier should be a plus for energy stocks. A strong dollar today may be depressing some stocks tied to commodity prices, especially gold (more on that shortly). Small cap stocks continue to lag behind. Chart 3 shows the Russell 2000 Small Cap Index struggling at its 200-day line. Today's dollar high, however, may help domestic-oriented smaller stocks.

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Chart 1

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Chart 2

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Chart 3

DOLLAR INDEX SURGES TO TWO-YEAR HIGH... Chart 4 shows the Invesco Dollar Index (UUP) gapping up today to the highest level in two years. Most foreign currencies are in the red, with the euro leading the way. Chart 5 shows the euro gapping lower today and nearing another test of its spring lows. Some weak economic news from Europe today has caused the 10-Year German bund yield to drop 6 basis points. That helped pull the 10-Year Treasury yield down 3 bps. The fact that eurozone yields are falling faster than Treasuries is weakening the euro versus the dollar. The rising dollar carries intermarket implications. A rising dollar usually has a depressing impact on commodity prices and stocks tied to them. That's especially true of gold miners which have been dropping (Chart 6). The stronger dollar may also be holding energy stocks back. A stronger dollar usually favors small caps as well. A stronger dollar also hurts performance of foreign stock ETFs that are quoted in the greenback. But there's a way to get around that.

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Chart 4

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Chart 5

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Chart 6

USING A CURRENCY HEDGED STOCK ETF ... While discussing the rally in eurozone stocks a couple of weeks ago on Stockcharts TV, I was asked if there was a way American investors could compensate for a weaker euro. There is and now is a good time to discuss it. Firstly, keep in mind that foreign stock ETFs are quoted in U.S. dollars. As a result, a foreign stock ETF loses performance if its local currency is weak against the dollar. Which is exactly the case in the eurozone. The green line in Chart 7 plots MSCI Eurozone iShares (EZU). And it's been rising this year. That blue line, however, has been rising even faster. That's the WisdomTree Europe Hedged Equity Fund (HEDJ). The reason for its stronger performance is that the HEDJ hedges out the negative effect of a weaker euro against the dollar. That's especially helpful like now when the euro is dropping.

The blue line in Chart 8 is a ratio of the unhedged EZU stock ETF divided by the currency hedged HEDJ. The falling blue line shows the EZU underperforming the HEDJ since September. That's due mainly to the falling euro (green area). The point of the chart is to show that a falling euro causes its unhedged stock ETF (EZU) to underperform its currency hedged version (HEDJ). Which is why Americans buying stocks in the eurozone should look for a way to hedge out the negative impact of a weaker local currency like the euro. The WisdomTree Europe Hedged Equity Fund (HEDJ) offers one way to do that.

Chart 7

Chart 8