Back in December when we wrote our post “Is It Finally Time To Sort The Euro” we got a lot of flack for saying that the US Dollar was bottoming out and that the Euro was going to drop.  We received e-mails telling us about all of the problems with the US and why the Dollar is going down forever.  Our basic answer has been that while the US has tons, and by tons we mean trillions upon trillions, of problems the US Dollar is not going the way of toilet paper anytime soon.

While we knew of many of the problems in the EU when we wrote our post we had no idea how bad and how fast they would manifest themselves.  As you can see in the chart below since our post the Euro has broken down, consolidated at the 200-day moving average, and then broke down some more. (Click on cart to enlarge)

EUR/USD Daily Chart

So what do we see going forward?  In our earlier post we showed a chart of the EUR/USD purchasing power parity that showed the Euro as being 35% overvalued relative to the US Dollar.  As you can see in the chart below the Euro has narrowed the valuation gap considerably but is still 22% overvalued to the USD.  We would not be surprised to see the EUR/USD hit the 2008 lows around 1.25 before finding strong support.  (Click on chart to enlarge)

EUR/USD PPP Chart

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-In The Macro Trader newsletter we are short the EUR/USD

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One trade that we currently like is that of shorting the EUR/SEK.  As you can see in the chart below the Euro has been losing ground to the Krona for most of the past year.  It formed a large head and shoulders top and then consolidated in a long bear flag until recently breaking down.  We think that this trade could go down to 9.5 over the next few months. (Click on chart to enlarge)

EUR/SEK Weekly Chart

We have been bearish on the Euro for some time now and lately the news has been going our way as many of the problems that were buried have been coming to the surface.  Not only is Greece in shambles but Spain, Italy, and Portugal are also near disaster as their debt costs continue to go up while their economies languish.  As the PIIGS continue to worsen there is more and more momentum building that could eventually kill the Euro.  We doubt that this happens any time soon but if the PIIGS are unable to correct their course it will happen.

Along with our negative view on the Euro another  thing that we really like about this trade is the extreme overvaluation of the Euro relative to the Swedish Krona.  As you can see in the chart below the Euro is trading at a 42.58% premium to the Swedish Krona.  While it has been outside of the 20% bands for a while now, we think that it is due time for a major correction on the weakness in the Euro and the relative strength of the Krona. (Click on chart to enlarge)

EUR-SEK PPP Chart

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-In The Macro Trader newsletter we are short the EUR/SEK

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Since the Match 2009 bottom many correlations have held extremely well.  We covered one in a previous post titled “US Dollar Correlation Breaking Down” and other ones here.  We can now add one more broken correlation to the mix.  TIPS and GOLD have been trading very much inline with each other over the last nine months or so.  The primary reason for the correlation is that since they are both seen as inflation hedges they should trade together.

As you can see in the chart below gold and TIPS have trade very much in line for most of the last nine months.  Over the past two weeks however the two instruments have diverged with TIPS going higher and gold going lower. 

GLD-Gold ETF and TIP-TIPS ETF

So the big questions are why are these diverging and how can we make money from it.  You irst have to decide if you think inflation is going up or down and if you think TIPS and Gold are good inflation hedges.  If gold is a good hedge and you think that inflation is going to increase then you would want to be a buyer of gold.  If you think that inflation is set to decrease or that inflation expectations are overdone then you would likely want to short TIPS.  The other main way to trade this is to bet on a convergence and a return to correlation.  To take advantage of this you could buy gold and short TIPS.

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-No positions in the securities mentioned.

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It has been a while since the last time we posted our global GDP weighted yield curve.  While it has been months it might as well have been a day as nothing has really changed.  After being inverted for all of 2007 and most of 2008 the yield curve flipped and became extremely positive as central banks worldwide lowered short term rates.  You can see this very clearly in the chart below of the G-10 nations short and long term rates. In spite of Australia raising theirs, short term interest rates remain extremely low everywhere else.

G-10 Short and Long Term Interest Rates

Another way to look at interest rates and in fact the title of this post is by using the global GDP weighted yield curve.  In the chart below you can see the global yield curve.  While it has fluctuated it has essentially gone nowhere for the last eight months.

Global GDP Weighted Yield Curve

So whats The Macro Traders outlook?  We think that things will remain more or less the same for most if not all of 2010.  On the deflationary side banks have not started to lend, real estate is not going up anytime soon, debt deleveraging is in overdrive, unemployment is as bad as ever, etc.  On the inflation side commodities are up, stocks are up, and bonds are up.  At best we would call this a standstill.  So while we could envision long term rates going higher on credit risk, yes we think that sovereign debt is full of credit risk, we think that short term rates will remain low for most if not all of 2010.

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-The Macro Trader is long TLT

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After a 72% move higher in the SP500 a lot of bears are saying that the market has gone far enough and that we are due for a new crash that will take us back to and in some cases past the lows of 2008.  While a crash is possible and probably justified we are instead looking for something along the lines of a modest pullback to maybe a 10% correction.

One of our favorite sentiment indicators is that of put/call ratios.  We use the 5-day equity only put call ratio to warn of high risk areas and to point our low risk areas.  As you can see in the chart below we are currently at a reading of .51 which is not only below out “high risk” threshold but is also the lowest reading in over a year.  While the signal could be wrong it is hard to argue that options traders are not overly one sided right now.

5-Day Equity Put/Call Ratio and SP500

In case you want to see more bearish sentiment look no further than the 10-day total put/call ratio.  Anything below .75 is typically considered very bearish and right now we have a reading of .68 which is the lowest reading in two years.  Needless to say this indicator is also showing that option traders are too bullish.

10-Day Total Put/Call Ratio and SP500

One price based indicator that we use at The Macro Trader fairly extensively is what we call a reversion to the mean chart.  Basically it takes a long term reading of the market, normalizes it, and then gives an overbought/oversold reading.  We then plot one and two standard deviation lines above and below the mean.  As you an see in the chart below we are about 1.5 standard deviations above the mean which is significantly higher than we saw for most of the 2002-2007 bull market suggesting that things are a bit overdone.

SP500 RTM Chart

Add to all of this a TD Sequential sell signal a few day ago and how near we are to a 50% retracement of the crash and things look less like a buying opportunity and more like a selling/shorting opportunity.  Again we are not calling for a new low, just a pullback/correction.

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-The Macro Trader is short the SPY-Sp500 ETF

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Here is a shocker…..in spite of rising stock and bond markets and the supposed V shape recovery more and more families continue to go 90 days or more delinquent on their mortgages.  As you can see in the chart below since June of 2007 delinquencies have risen every single month. (Click on chart twice to enlarge)

Freddie Mac Delinquencies

To put this into perspective let’s drill down into the numbers a bit.The historic average delinquency rate for non-credit enhanced is .71% and the current reading is 2.88%.  The historic average rate for credit enhanced is 2.81% and the current reading is 7.84%.  The historic average rate for total is 1.08% and the current reading is 3.72%.  And finally the historic average rate for multi-family is .04% and is currently at .14%.  In case you haven’t noticed the current reading on each of these is anywhere from 2.8 to 4.08 times their historic average.

This is just one of the indicators pointing to further weakness in residential real estate.    One potential trade that we are following is that of shorting IYR.  For now we are just stalking it as it continues to move higher but we expect that in the next one or two months the reality will once again hit home and investors will start paring off some of their gains as the underlying fundamentals do not justify current prices let alone higher ones.

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-The Macro Trader currently holds no positions in housing related stocks.

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While many investors are calling for a large drop in long term Treasuries we are currently seeing a good risk reward trade to the long side in the long bond.  In the chart below you can see our reversion to the mean chart on the 30-year Treasury yield.  When it is stretched to the downside things are bearish and when it is stretched to the upside it is bullish.  Right now it is stretched almost 1.5 standard deviations away from its historical mean which usually leads to a move lower in yields and a move higher in bond prices. (Click on chart twice to enlarge)

30-Year Yield Reversion to the Mean Chart

As you can see in the chart below of the 30-Year Treasury yield we are at the top of a long term downtrend in yield.  Each time since the 1987 that yields have hit this line they have gone lower.  Eventually this will stop and yields will breakout to the upside but if history is any guide and the trend continues than at least for now yields are once again headed lower. (Click on chart twice to enlarge)

30-Year Treasury Yield

Finally lets look at the LT 20+ year Treasury bond ETF.  As you can see below it has found support over the last seven months in the highlighted $86-89 range.  On the upside we have resistance around $98.  The risk to reward is quite favorable right now as we can risk $1-2 with an upside around $9.  (Click on chart twice to enlarge)

TLT-20+ Year Treasury Bond ETF

So while this may be the time that Treasuries tank and yields go screaming higher we doubt it and are modestly positioned to the long side.  Eventually we will be shorting Treasuries but not until yields break out and end the trend that has been in place for over 20 years.

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-The Macro Trader is currently long TLT

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While extremely bullish sentiment does not always call tops it has never, at least to our knowledge, ever called a bottom either.  Looking at the chart below of the Investors Intelligence Bull Bear Ratio along with its 13-week (3-month) moving average you can see that not only has sentiment risen as fast as the market but it is at highs not seen since 2004.  While this is not necessarily a sign of a market crash like some would lead you to believe we do think that the current situation warrants caution.  We are currently not selling off our long positions but we are holding off from most long opportunities right now.   (Click on chart twice to enlarge)

Investors Intelligence Bull Bear Ratio

Happy Trading,

Dave@TheMacroTrader.com

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Over the past year one of the biggest themes has been to short the US Dollar and go long anything that is considered risky.  If you bought stocks, any grade of corporate bond, commodities, even real estate stocks and you would have made money.  Many strategists, The Macro Trader included, used the falling US Dollar as a reason to go long stocks, bonds, commodities, etc.  The reason of course is that since the March bottom the USD and the SP500 have been almost perfectly inversely correlated.  Well that relationship appears to be breaking down right now as the US Dollar has been rallying and other risk assets have not been falling in sympathy.

In the chart below you can see how as the US Dollar has fallen, the SP500 has risen.  In fact when there is a wiggle in the USD there is an opposite move in the SP500.  As you can see in the bottom right hand corner the USD is rallying while in the top right hand corner the SP500 is still looking strong. (Click on chart twice to enlarge)

US Dollar vs SP500

Of course if this inverse correlation is falling apart the correlation between the SP500 and the Euro is also falling.  Apparently, at least for now, you are able to be short the EUR/USD and still be long stocks and make money.  Looking at the chart below you can see almost the exact opposite of what we see with the US Dollar.  As the SP500 has moved higher the Euro has climbed as well until the last few weeks as the Euro has tumbled and equity markets as well as other risk assets have managed to remain strong and in many cases hit new highs. (Click on chart twice to enlarge)

Euro vs SP500

What do we take from this?  One thing is that the carry trade using the US Dollar was not as heavy as many people feared.  Another thing is that the market is always changing and that many intermarket relationships work well in some periods and fall apart in others.  As always it is important that we have solid risk management principles and that we are open to change.  For now we are short the EUR/USD and long equities…but that could change tomorrow.

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-The Macro Trader is long several equity index ETFs such as IWF, EWZ, and MOO and we are short the FXE-Euro ETF.

If you’re getting value out of our posts, you can do us a favor by linking to us and mentioning The Macro Trader to friends and co-workers. Here’s the link information for this article:
Title: US Dollar Correlations Breaking Down
URL: http://www.themacrotrader.com/2009/12/16/us-dollar-correlations-breaking-down/

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Yesterday we wrote about how we feel that the Euro is headed lower due to overvaluation, the technical picture, and market positioning.  In light of that we thought that we would show the technical picture of the US Dollar index.

In the chart below you can see a chart of the US Dollar index all the way back to 1971.  In the lower panel we have plotted the distance from the 200-day sma shown as a percentage.  Not surprisingly the index rarely strays more than 10% away from the 200-day.  In fact since 1971 it has only gone above or below by 10% 11 times.  Since 1992 it has only breached the 10% level once back in 2008 in the midst of the financial crisis. Right now we are close to the lower levels of a typical move.  Could it go lower?  Of course the answer is that yes it can, but if history is any guide we doubt that we have much lower to go before a decent sized bounce. (Click on chart twice to enlarge)

US Dollar Index

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-In The Macro Trader newsletter we are currently short the EUR/USD

If you’re getting value out of our posts, you can do us a favor by linking to us and mentioning The Macro Trader to friends and co-workers. Here’s the link information for this article:
Title: Is It Time To Buy The US Dollar?
URL: http://www.themacrotrader.com/2009/12/10/time-for-us-dollar/

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