As greenback swoons, global player Big Blue benefits from foreign revenue

stocktrends.ca

The Stock

International Business Machines Corp. (IBM)

Recent price

$122.11

Trend

The stock market responds to many different currents, but currently none directs investor equity like the changing value of the U.S. dollar. Whether rising commodity prices, the ascent of bullion to the $1,000 (U.S.) mantle, or the international capital flows that underpin the bond market - all are feedback to the bearish trend of the greenback. The dollar has been losing ground since the beginning of March, a notable juxtaposition to the stock market rally dating from the same time. Investors should pay heed.

While the allure of the materials sector, specifically hard commodities and precious metals, gives the Toronto Stock Exchange a glimmering shine in this monetary environment, a falling dollar also has a positive spin for U.S. multinational corporations that stand to benefit. Many of these multinationals generate a significant portion of their revenue from overseas operations, making exchange rate changes a practical concern for the company's bottom line.

The best-performing Dow Jones industrial stock in the third quarter is Caterpillar Inc., outpacing the S&P 500 by 37 per cent, but other multinational stocks like General Electric Co., E.I. du Pont de Nemours & Co. and 3M Co. are rallying as investors recognize the favourable foreign exchange dynamic for these companies. Both General Electric and Coca-Cola, another global brand icon, traded in unusually high volumes last week.

The Trade

Stock Trends has been bullish on technology stocks since June, and as the summer comes to a close, they remain leading performers. Big Blue - IBM - scaled to a 52-week high last week. About two-thirds of IBM's revenue is generated overseas, so the company's performance is highly tuned to the strength of global markets. The technical picture for the stock is encouraging, too. After stumbling to the $100 level in mid-July, IBM's stock rallied back along its bullish trend, but traded in a range for the last two months. Last week's advance above the summer's high at the $120 level opens the door for a fourth-quarter rally. Investors can trade this bullish stock on improving trading volume, sector strength and the bearish U.S. dollar.

The Upside

IBM's share price peaked at $130 in the summer of 2008 before last year's calamitous bear market tailspin that sent stocks, big and small, tumbling. IBM bottomed at $69.50 last November and has climbed back to the lower end of its summer 2008 valuation. Investors entering this trade now have a modest 7-per-cent gain as a minimum objective. The stock's all-time high of $139.19, achieved at the peak of the tech bull market 10 years ago, could be attainable during this bull market if the current conditions continue to bring participants back into equity markets. As the Dow's only $100-plus stock, demand for IBM is driven primarily by expanding institutional demand.

The Downside

The 13-week moving average trend line currently puts support for IBM at $115, but the Stock Trends Weak Bullish indicator would not be triggered unless the price drops to $111.

Investors buying IBM now can exit if the stock drops by 8 per cent to 10 per cent.

Skot Kortje has been analyzing stock market trends for 15 years using trend analysis. His Stock Trends indicators have been published by The Globe and Mail since 1995.