Steep Bets Against Euro May Backfire
Wednesday, December 7th, 2011
By Michael Lombardi, MBA for Profit Confidential
When everyone is on the bandwagon, that’s the time to get off…
According to a report from the CFTC, short positions against the euro were at net $14.4 billion in the third week of November—a 17-month high. Seems everyone is betting against the eurozone and, with such a heavy consensus trade, I wouldn’t be surprised to see the trade—short euros against the U.S. dollar—backfire.
I’ve written this many times: the market usually does the opposite of what is expected of it. Whenever investors and speculators take a major position (like their current heavy bet on the immediate demise of the eurozone), the market usually delivers the opposite. In this specific case, if the eurozone shorts need to cover their positions, the euro could rise sharply against the dollar.
Please don’t get me wrong; I still have the belief that, in the long term, the eurozone is done. I believe it was a mistake in the first place. Either the weaker countries will need to exit the eurozone or Germanywill exit the currency. Bailouts by the European Central Bank (ECB) or International Monetary Fund (IMF) are just short-term, “print more money” bandages for the eurozone. No structural changes are made by piling debt upon debt or by printing money—only inflation is created, which will turn out to be a more serious problem.
However, in the short term, the euro may have become too oversold and there may be too many immediate bets against the eurozone, all of which could lead to an unexpected spike in the value of the euro versus the U.S. dollar.
Where the Market Stands; Where it’s Headed:
The Dow Jones Industrial Average opens this day up five percent for 2011. Add in a 2.5% average dividend yield for the year and stocks have returned about 7.5% in 2011. The current trend for the market is to open up sharply in the morning, with the momentum lost by the end of the day.
I’m getting a little worried about rising bullish stock advisor sentiment. While the alarm bells aren’t ringing yet, hope over a resolution to the eurozone debt crisis is turning stock advisors more and more bullish. I’m keeping an eye on this development. This stock market has gone up the “wall of worry” for 32 months now. Each time stock advisor sentiment has turned decisively bullish, the rally has retreated.
We continue to trade in a bear market rally in stocks that started on March 9, 2009.
Next Post: We’re in a Breakout, But Is It JustAnother Bear Market Rally?
Previous Post: Stock Market: What You Can
Expect From It in 2012
Tags: ECB, European Central Bank, european economy, eurozone, U.S. debt crisis, U.S. dollar
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Michael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Today, Michael only employs the top market analysts and editors. Some of our recommendations have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Along the way to building Lombardi Publishing Corporation, now with over one million customers in 141 countries, Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland.Follow Michael and the latest from Profit Confidential on Twitter
