Yesterday, the U.S. dollar tumbled after President Trump commented on Fed policy. In an interview with CNBC's Joe Kernen, Trump expressed his displeasure with both the strong dollar and rising interest rates.
From a global perspective, the Fed is the only major central bank that is currently raising interest rates. Higher rates make U.S. fixed income investments attractive relative to other countries. The disparity in rates creates a flow of capital from other countries into the U.S. Overseas investors must sell their own currency and buy dollars in order to take advantage of higher U.S. rates.
From a technical perspective, Trump's comments came at an inflection point in the U.S. Dollar Index ($DXY). The greenback was trading at its highest level in a year and appeared ready to break out of an inverted head and shoulders pattern (L-H-R). This is a huge version of the pattern that has formed over the past eight months, and it projects a substantial gain to the 100 area.
There are numerous ways to play a strong dollar. One involves owning small-cap stocks. These companies tend to do most of their business within the U.S. and are therefore less likely to feel the negative impact of a strong buck.
One convenient way to play small caps is via the iShares Russell 2000 index ETF (IWM) . This ETF is designed to mirror the performance of the small-cap index. In addition to offering reduced exposure to dollar strength, these companies are also less likely than big multinationals to be directly impacted by international trade disputes.
Technically, IWM is firmly locked into a bullish channel. The index is stronger than all the other major indices, with the exception of the NASDAQ. IWM is closing in on an all-time high.
Although it's not a small cap, one name that may be sheltered from dollar strength is Chipotle Mexican Grill (CMG) . Chipotle has over 2200 locations, and of those, less than 50 are located outside the U.S.
After a few rough years, Chipotle stock is back on track, climbing 57% year-to-date. Chipotle has another 10% of upside before it encounters its next resistance level of $496 (red dotted line).
Finally, Century Communities Inc. (CCS) is a small-cap name worth checking out. This U.S.-focused housing manufacturer has a market cap of less than $1 billion. Century Communities is forming a bullish rounded bottom (semicircle) and is within striking distance of its all-time closing high of $35.50.
How to find more opportunities like the ones above? I like to start by looking for U.S. companies that have little international exposure, and then use technical analysis as a filter. These are just three of many potential ways to avoid the pain of the strong dollar.
(This article by Ed Ponsi originally appeared on Real Money Pro at 10:00 a.m. ET on July 20. Click here to learn about this dynamic market information service for active traders and to receive Doug Kass's Daily Diary and columns from Paul Price, Bret Jensen and others.)