One way to think about this situation is to envision this trade as “pair trade” that is put together by computers. And as a matter of risk management, the short dollar/long stocks, commodities, and emerging markets trade also has an inverse trade built to be run when things go the other way. You can think of this as a very sophisticated “stop” order that involves several moving parts and some big computers.
Yes, it is true that politics entered into the mix on Thursday when Obama launched into his latest rampage against the banks (frankly, I still don’t understand why the President thinks picking a “fight” with the nation’s banks is a good thing). And it was politics that created much of Friday’s shellacking. But up until that point, the big, fast moves in the market were, in our opinion, program driven trades that were tied to the U.S. Dollar.
One of our major investment themes is that we need to understand “why” things are happening. While I’ve mentioned this a time or two hundred, our thinking is that if we can grasp what is driving the market on a short-term basis, we are unlikely to be surprised when the market’s big picture environment starts to shift.
Thus, in light of the fact that our 2010 roadmap includes a substantial correction at some point during the year, we are on the lookout for anything that will cause the bulls to step aside – even if for just a few months. And in our humble opinion, this dollar trade could be just the trigger our furry friends are looking for.
You Too Can Play the Game
If you are so inclined and want to get into the action, you too can play this game with ETFs. For example, if the dollar breaks above an important resistance zone, it is a fairly safe bet that stocks will move lower. So, if the UUP (PowerShares DB US Dollar Index ETF) moves over $23, you could buy the UUP and at the same time go short the U.S. Stock Market via the ProShares Ultra Short S&P 500 (SDS), the emerging markets via the ProShares UltraShort Emerging (EEV) and the commodities index via the ProShares UltraShort Commodity (CMD) or by shorting the DBC itself. Voila, you’ve got yourself a trade designed to profit from the dollar-carry unwind.
Finally, this brings up a key point. The short dollar/long risk assets trade was VERY popular last year. Thus, it makes sense that if the dollar begins to rally, the opposite trade might become all the rage. And since the hedge funds these days tend to gravitate toward ETF’s, you can see how easy it is to implement such a trade – even for the little guys!
Wishing you green screens,
David D. Moenning
Founder TopStockPortfolios.com
Positions in Stocks Mentioned: None
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The opinions and forecasts expressed are those of David Moenning, founder of TopStockPortfolios.com and may not actually come to pass. Mr. Moenning's opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report and on our website is for informational purposes only. No part of the material presented in this report or on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the editors of TopStockPortfolios and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. Stocks should always consult an investment professional before making any investment.
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