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Risk Trade About to Bounce Back


by: Daily Trading June 14, 2010 | about: CEW / EMB / FXE / GLD / HYG / IWM / JNK / PCY


What if the euro was to "bounce" to the 1.30 level over the coming days? Where would equities, commodities, high yield bonds and currencies and Treasuries be then? I don't think it takes a rocket scientist to work that one out.

Now what are the odds of the euro getting to 1.30 over the coming days? Well let me put a different spin on that.......given that short positions on the euro are at record highs and sentiment is so bad that the euro is now talked about at dinner parties, cocktail events, and it now graces the covers of magazines (like Newsweek) and newspapers, it is difficult to work out just where the marginal bear/shorter is going to come from. When markets get to such extreme oversold conditions it does not take much to spark a "short covering" rally from the depths of the earth.

What is likely to be the event that ignites a short covering rally? Well it is likely to be as insignificant as the "leaked" document that indicated that Citigroup was profitable in the first quarter. If this is over your head, this was the proverbial "final straw that broke the bears back" in early March last year!

Anyway I have tried to put this blog together quickly today and perhaps I have not got the words out in the way that does my reasoning/thinking justice. Let me say this: intermarket correlations are either at or very close to record highs. If you are bearish equities then by "default" you are bullish the USD, which by implication means that you are bearish the euro. Now being short the euro is perhaps one of the most crowded trades in modern history (maybe second only to being long TMT stocks in February 2000). The essence of The Art of Contrary Thinking ("when everyone thinks alike the opposite is most likely to happen") rings loud in my ears.

It is interesting to note that the US stock market has not broken support levels, and perhaps more importantly the Russell is only a good 10 dahttp://seekingalpha.com/article/209889-risk-trade-about-to-bounce-backys away from breaking to multi-week highs again. Have you looked at how the STOXX 600 is behaving lately? Have you seen how emerging markets are close to breaking out of their three week old trading range?

cont

http://seekingalpha.com/article/209889-risk-trade-about-to-bounce-back