×

Why the strong dollar means trouble for stocks

The dollar rally is on a roll but it may soon take its toll on stocks.

For a record 12 weeks in a row, the U.S. dollar index has rallied to its highest levels since 2010. Against the euro, the dollar is at two-year highs while against the yen, the U.S. greenback hasn't been at these levels in six years.

While that may be great for some American companies buying goods and services abroad, the dollar's strength is not all good news. And in the past month, the U.S. dollar index is up 2 percent while the equity benchmark S&P 500 index is down 2 percent.

(Watch: Party's coming to a close for high-debt companies)

"There are two sides to every currency story," said Gina Sanchez, founder of Chantico Global. "A stronger dollar does hurt companies doing business abroad because it raises the cost of doing business there. It weakens your sales."

For stocks in the S&P 500, that could spell trouble. A little under half of their revenues come from outside the United States, said Sanchez, a CNBC contributor.

To top it off, the dollar may continue to stay high or even get stronger still as Europe's economy shows signs of weakness, Sanchez predicts. "We might actually see quantitative easing in Europe," she said. "That asynchronous policy is probably going to put a lid on the euro and keep the dollar strong."

The technicals also point to trouble for stocks, according to Richard Ross, global technical strategist at Auerbach Grayson.

"Over the past 10 years, it has meant pain whereby a stronger dollar has largely coincided with weaker equity prices and weaker commodity prices," said Ross, a "Talking Numbers" contributor. "However, that hasn't been the case throughout much of 2014 as stocks continuing to push out to fresh highs in the S&P 500."

(Read: Dollar pauses after payrolls surge)

But while a one-year chart of the S&P 500 may show signs of technical symmetry, it could also be a road map of how things could get worse if Ross is correct.

Ross notes that the S&P 500 dropped roughly 4.6 percent to its 150-day moving average in early October 2013. Similarly, it dropped by the same magnitude in early October of this year, testing the moving average currently at around 1,929.

Just don't expect the S&P 500 to bounce and rally from the 150-day moving average as it did last year, warns Ross. And it's all because of this year's dollar rally.

"This time it is different largely because of that stronger dollar," said Ross. "Don't go to the same handbook that you played from last year. I think we break below that 150-day at 1,929 and move lower before ultimately, we get a better buying opportunity before year-end."

To see the full discussion on what the stronger dollar means for the S&P 500, with Sanchez on the fundamentals and Ross on the technicals, watch the above video.

-----
Follow us on Twitter: @CNBCNumbers
Like us on Facebook: facebook.com/CNBCNumbers