Tuesday, December 15, 2009

Constructive Action in US Dollar (UUP)

This move in the US dollar might actually have some legs to it... after many false starts.  Stockcharts.com does not update the dollar in real time, so this chart is a day behind, but today the greenback index is up 0.8% (just under $77 as I type this) so you can add that to the already nice move.

[click to enlarge]

As you can see the 50 day moving average has been sliced through for the first time in a long time (April 2009) ... now when the currency peaked its head over that moving average back in early spring, it was whack-a-moled so the coast is not entirely clear, but the short dollar trade must be thousands of times more crowded now then it was then.  So this could feed on itself if it continues. 

In retrospect my long dollar call options - bought Nov 24th, [Nov 24, 2009: Bookkeeping - Going Long the Dollar and Volatility] which turned negative on me for a few weeks, could turn out to be a nice strategic move if this keeps up.  The dollar fell sharply on the 25th - spiked on Dubai, then retested that low on Dec 1st, in what now appears to be a double bottom... so thus far, we missed by the exact bottom by 24 hours - not too shabby.  While I entered this position due to no soul on Earth left standing who liked the dollar (including myself) - I thought it would act as protection if the market fell (due to the inane relationship between the market and dollar throughout 2009) - instead it is rallying as the market holds. 

What this signals for the greater market - who knows.  In the past the dollar and market could go up together, and DID go up together many times.  As I have stated many times this ridiculous "dollar drops, everything else goes up" trade is just a newly invented algorithm and I, for one, would like to actually be able to use my brain once more when it comes to the stock market, rather than be a hostage to 1st grade logic.

Many commentators of the CNBC sort will say this signals rates rising and "tighter" policy blah blah.  Let me tell you, if the Fed sells $1 trillion worth of toxic junk off their balance sheet while in parallel raising rates to 1% they'd still be in far easier monetary position than Alan Greenspan had us positioned for multiple years, in helping to create the housing bubble.  That's how egregious Ben Bernanke currently is.  So it's all relative... all it would signal to me is moving from level 100 of cheap and free money to level 96.  So let's be clear, once this counter trend of a very crowded trade plays out - we're still looking at a country with Japan like policies - and that country's currency (yen) has been trashed for multiple decades.  Hopefully this can continue for a few weeks or months, clear out all the "me too" shorts, and then lets us buy currencies of fiscally responsible / commodity based countries at cheaper prices in 2-4 months.

As for cross currents, we have to see if commodities can go up despite the dollar (thus far holding in there), if gold (another crowded trade) can stay stable (thus far fallen back to 50 day moving average), and the greater market itself can rally (thus far holding in there). 

As long as the 50 day moving average holds, I will be interested in expanding the long dollar position either through ETF UUP or more calls. 

Long UUP calls in fund; no personal position

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