Trade Ideas for 11/23/09

Over the course of the bear market rally, markets that were formerly uncorrelated, or even inversely correlated, have become tightly coupled. A good example of this is gold. Rising gold used to mean bad news for the market; nowadays, gold rises alongside the S&P. This phenomenon has come about because of the dollar carry trade. As short-term interest rates have fallen to zero, the dollar has become the cheapest currency to borrow, and these borrowings are used to fund positions in risk assets such as equities, commodities, and futures. As the carry trade has gone on, correlations between the price of the dollar and formerly unrelated markets have increased dramatically. For example, here is a chart of the Dow overlaid with the inverse price of the dollar:

The pressures put on the dollar as the entirety of the world's investing classes effectively short it will cause the dollar to either collapse or surge upward (or both). In fact, this happened early Friday, when dollar futures surged from 76 to 82 on around 2,000 contracts. This led to a surge in the dollar's spot price, a dump in stock futures, and highs of the day for bearish ETFs in pre-market trading. The ICE busted the trades in the dollar futures market, rendering them invalid, but the price movements in the correlated markets stood, proving how sensitive these markets are to the dollar. I wonder how long this system can last; perhaps a long time if the exchanges continue to bust trades.

The market recovered from the brief surge in the dollar, although most indices made a lower intraday low versus Thursday. Looking ahead, next week is a holiday week, and the expectation, based on previous Thanksgiving weeks, is that markets will rise on light volume. However, with the amount of pressure on the dollar and the weakening of internals mentioned in the previous post, anything can happen.

Current Holdings
Ticker	Basis	Closing Price	Perf.	Sell-Stop	Addl Exit Guideline	Chart
TWM (trending)	27.58	29.28	+6.2%	27.27	N/A	Chart
QID	21.31	23.37	+0.3%	20.39	N/A	Chart
TBT	46.16	45.84	-0.7%	45.12	N/A	Chart

Some long ideas in the event the market drifts upward during the holiday week; short ideas in case the carry trade unwinds.

New Trade Ideas

Ticker	Entry	Exit A	Exit C	Chart
TCK (Teck)	35.03	33.73	N/A	Chart
GGB (Gerdau)	17.01	16.24	N/A	Chart
FITB (Fifth Third)	10.21	9.85	N/A	Chart
FNM (Fannie Mae)	1.07	0.99	N/A	Chart
DXD (Ultrashort Dow 30)	30.76	30.21	29.73	Chart
SKF (Ultrashort Financials)	25.01	24.49	23.91	Chart
EEV (Ultrashort Emerging Markets)	11.92	11.49	N/A	Chart

Please refer to "How To Trade The Ideas" (right-hand side) to read this table.