Contrarianism at its Best: The US DollarNov 19, 2012
Chad Karnes, CMT
The US dollar had a record amount of bears in September and October. So why were we bullish on the dollar? Wall Street missed a high probability trading opportunity.
Was it crazy to be bullish on the Dollar since mid-September?
Everyone was bearish the dollar; the media, the Wall Street strategists, the major money management firms. Why not? Given the recent Fed actions of QEternity; it is the safe and easy argument. But they have been wrong.
In our October ETF Profit Strategy Newsletter published 9/21, we laid out a case for why the US Dollar is a good short-term buy. That trade is working out very well as the trade-weighted US Dollar has risen from a low of 78.50 to 81.39 on 11/16. (In the currency world, this is a significant move.)
What Everyone Else Thinks
One of the reasons, among many, we were bullish on the dollar is because of overly bearish sentiment. The short dollar trade has been more popular than Justin Bieber and when trades get too popular they also usually get crowded with little “oomph” to propel them further.
The Fed's easy money policies are a major part of the bearishness toward the dollar. This can also be seen from some recent headlines that support a bearish dollar and bullish Pound & Euro (NYSEARCA:FXE):
“Dollar Off, Sterling (NYSEARCA:FXB) Jumps as UK sees Growth” – Marketwatch - 10/25/12
“Dollar Suffers first drop in Five Days, Bears Ready to Run on NFPs” – DailyFX - 10/5/12
“ Just When you Thought the Euro crisis was Subsiding” - (Not us) - Washington Post 11/8/12
Every day there are news articles trying to justify the daily swings of the markets and currencies (NYSEARCA:FXY). Do they really help us make profitable decisions? (Hint: the answer is no).
The Contrarian Opinion Matters
There are numerous opinion surveys that reflect public and investor sentiment on the Dollar and other assets.
When public opinion in these surveys reaches extremes, a turning point in the asset is usually very near. Counter-intuitively, when opinion hits its most bullish is usually when tops occur and when sentiment is most negative is usually when bottoms occur.
In September negative sentiment in the US dollar hit a level that had not been seen except a few times in the past; coincidentally when the dollar was forming a bottom.
Knowing which way the dollar is headed has much larger implications than what appears on the surface due to its highly correlated nature with other assets, especially the stock markets (NYSEARCA:IWM). Given the size of the Dollar market, it is the proverbial gorilla in the room. In the article found here I discuss the dollar’s importance in the macro environment including the S&P (NYSEARCA:SPY).
The Charts Matter
In the article I wrote on 10/26 entitled “Is a Dollar Collapse Nigh,” I laid out the case why the dollar was poised to rally, not fall. I attached this chart and explained why getting long the dollar or its ETF equivalents was a good trade setup.(For closer view of chart click here.)
Here is that chart updated for our subscribers on 11/11 with the dollar up over 2% since then and levered ETF and forex traders long the dollar up a lot more than that.
In our October Newsletter on 9/21, we advised the purchase of dollar ETFs such as the PowerShares DB US Dollar Index (NYSEARCA:UUP) and the PowerShares 3x levered equivalent (NYSEARCA:UUPT) as a result of that high probability trade setup. Both of these Exchange Traded Products are up admirably. We also identified price targets as well as stop locations. While the rest of the world was negative on the dollar, we've capitalized on the short-term opportunity.
The ETF Profit Strategy Newsletter monitors global events and formulates profit strategies based on fundamental, technical, and sentiment research. High probability trades like the dollar is what we look for in trading opportunities. The dollar’s rally won't be indefinite, but we are looking for a few things to occur before selling out of profitable longs.
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