Saturday, September 12, 2009

Dollar Llama (dollar hedge explained)

I've been asked a few times about my getting long the dollar this week. The answer is buried beneath here already, but I may as well summarize...

To be obvious about it, the declining Dollar has been inversely correlated with rising equity markets. Similar to when equity markets were decimating lower and the Dollar was inversely strong.

That probably says it all, but this week we saw a couple of things which caught my attention. On Wednesday the Dollar broke hard again, to fresh lower-lows, following a 5-week consolidation scraping along the area of previous lows. But while this $-plunge to new lows was met with nearly-universal sentiment (traders, financial press, blogs, boards, etc.), comparing the Dollar to green turd, the major indices on the US stock market were managing new highs, but not to the degree the Dollar was managing new lows; something of a divergence.

Gold was another diverging factor. We saw a far more dramatic rise in gold and silver than we saw a fall in the Dollar.

This in and of itself is not enough for me to get cute and get long the Dollar. But it was enough (that and a couple other factors) to make me fear getting caught with heavy long-equity exposure if this is some bulltardian-trap and not a renewed acceleration higher for stocks.

The Dollar has followed-through lower some, but not very much since the second gap-lower on Wednesday (the day I started this nonsense). And anytime a market as big as the currency market has everyone convinced it is going one way AND it is showing any resistance in moving that obvious direction - then a sizable counter-move is not at all out of the question.

So this is less a bullish call on the Dollar but a hedge instead. Kind of like if at the 4th of July or Bastille fireworks parties you notice your neighbor's kid is really really into lighting fuses.

You might double-up on the fire insurance after seeing that.

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