What if the Euro was to “bounce” to the 1.30 level over the coming days? Where would equities, commodities, high yield bonds and currencies and treasuries be then? I don’t think it takes a rocket scientist to work that one out. Now what are the odds of the Euro getting to 1.30 over the coming days? Well let me put a different spin on that…….given that short positions on the Euro are at record highs and sentiment is so bad that the Euro is now talked about at dinner parties, cocktail events, and it now graces the covers of magazines (like Newsweek) and newspapers, it is difficult to work out just where the marginal bear/shorter is going to come from. When markets get to such extreme oversold conditions it does not take much to spark a “short covering” rally from the depths of the earth. What is likely to be the event that ignites a short covering rally? Well it is likely to be as insignificant as the “leaked” document that indicated that Citigroup was profitable in the 1st quarter. If this is over your head this was the proverbial “final straw that broke the bears back” in early March last year!
Anyway I have tried to put this blog together quickly today and perhaps I have not got the words out in the way that does my reasoning/thinking justice. Let me say this, intermarket correlations are either at or very close to record highs. If you are bearish equities then by “default” you are bullish the USD, which by implication means that you are bearish the Euro. Now being short the Euro is perhaps one of the most crowded trades in modern history (maybe second only to being long TMT stocks in February 2000). The essence of The Art of Contrary Thinking “when everyone thinks alike the opposite is most likely to happen” rings loud in my ears. 
It is interesting to note that the US stock market has not broken support levels, and perhaps more importantly the Russell is only a good 10 days away from breaking to multi-week highs again. Have you looked at how the STOXX 600 is behaving lately? Have you seen how emerging markets are close to breaking out of their three week old trading range? 
The CCI remains above the key 450 level (that is important to us only). Again given that the CCI has not collapsed given how strong the USD Index has been over the last few months says something in itself. Also note that the JOC Industrial Commodity Index has NOT broken below its February low. We believe that the next big move for commodities will be up. Anyway above 450 on the CCI bullish commodities, below bearish. 
Gold making the cover of the NYT, gold ATMs in the UAE, mints running out of coins, demand for Kruger Rands at multi-year highs……all the contrary signs are there for a pull back in gold over the coming days. But we would be buyers of any pull back. 
The flow of funds into bond funds (more or less at all time highs)…….more signs to delight contrarians. 
No multi-week low in junk grade bonds as yet, which is rather bizarre given how bearish everyone is towards “risky” assets. Yes we can see the weakness in junk grade bonds but we also see JNK and HYG and relatives EMB and PCY intimating that they want to break higher. In any event the mere fact that junk bond funds have not registered multi-week lows after redemptions mirroring those of September/October 2008 is a miracle. Again massive outflows always catch the attention of us contrarians.
If there is one concern we have it is the weakness of emerging market currencies and high yield currencies. Yes they did “breakdown” and that is a rather bearish omen from a technical perspective. But markets are set to test us and often they will break a support line just to fool us. Yes one could accuse us of not getting bearish of emerging market currencies when there is such a significant bearish break but sometimes one needs to bend the rules a little……and now is one of these times. If 
Anyway if emerging market currencies and high yield developed currencies make new lows from here we will run for the hills. Because new lows here will coincide with lows in junk grade bonds and emerging market bonds. And then we will have to stand up and say we are wrong in holding a bullish view on the risk trade. Until then we remain bulls in a sea of bears
Disclosure: long VTI IWM DBC GLD TBT CEW JNK DBV
World Markets About to Resume Their Uptrend $VTI $IWM $DBC $GLD $JNK $TLT $CEW $DBV
June 14th, 2010 § 0
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