In Forex and Futures Commentary

Tonight the big question is: how much time will it take for the US Bailout Plan to go through? I sat at my desk today listening to hours of Senators and Congressman grilling Paulson and Bernanke for all the questions on the nation’s minds, and I along with many others realized that this plan isn’t going to pass in a heartbeat.

Selling versus buying:

In terms of the equity markets, selling is usually a one-time decision. Buying is far more likely to be averaged in over time. That’s why is not unheard of for markets to decline much faster than they accelerate.

Right now we have a short selling ban on financials (which account for appx 15% of the SPX) and we’re still seeing SPX move lower over the past two days. Like I said before about the Fannie and Freddie bailout, when everyone was buying the night it happened, I sat back and said “This is overall some really bad news; it shows us in horrible, vulnerable condition”. The market sank hard and fast the next day, basically qualifying the theory.

So here were are – after an 8.5% gain in two days, everything is selling again, because reality has kicked everyone pretty hard, and the word is spreading to the mom and pop investors; general investors are liquidating much of their portfolios, hedge funds are cutting back on long exposure, etc. People are generally scared as hell to buy anything, and after taking such deep losses, trying to stop the bleeding.

Short term and what I’m looking for:

Number one: How long before this thing gets passed? Because the way things are going, the longer it lingers, the more red ink is going to smear. Its passing will at least promote temporary optimism and get the gears going again.

Number two: If SPX keeps moving lower we’ll probably actually see USD strengthen temporarily, as traders pull down the price of carry trades, which will weigh down on EUR, AUD, etc. In steep declining markets, the selling of these trades is a strong force, as we’ve seen.

Number three: Looking at the commodity correlation, I think we’ll be buzzing in consolidation until we hear the verdict on the bailout. People are going to be waiting to move much of their dollar assets to gold, etc, until we get more news.

Bottom Line: I don’t think its too early to be looking for some good places to go short the dollar; there are still less net buyers than sellers; waiting for things to get moving again. I’m looking for EUR, GBP longs, and USD/JPY I want to find some longs, as well. Likewise, looking for EJ longs, etc. But I’m prepared to assume the risk that more drawdown might lie ahead, however, which is very important to note. So in terms of intraday trades, I wouldn’t be afraid to go long or short.

But its all contingent on time – we’ll see how long this really takes. That much, no one can predict, but we expect it to occur within the next few days to a week or two.

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