We are currently living in a world of bubbles: the dot-com bubble, the credit bubble, the housing bubble, the subprime bubble, several stock bubbles, the to-bust derivatives bubble and other various bubbles, bubbles and more bubbles and unfortunately it is not as pleasant as having a Champagne bath (well, I guess), particularly when it finally busts. Your very humble and modest Bear Lord Sauros knows a bit about the Boom and Bust cycles as in my young days, like driven by a fatal attraction I was professionally implied in all the bubbly businesses that busted and brought the financial system to the brink of a collapse this past decade: I’ve seen rises and I’ve seen falls from the inside.
Let us remind the old good booming times: back to end 2006-early 2007 when it was raining money and the bankers made it rain! I can even remember there was a shortage of Champagne in London so the bonus pools were huge that year. At that time, the Banks used to organize off-site "seminars" all around the world to motivate their troops with prophetic speeches "Next year if you keep on stuffing our Clients with our exotic products, you will all receive bonus of zillions each in 2008, buddies". I attended myself plenty of those, including one that took place in Dubai. The main characteristic of a boom phase is that everybody, I mean everybody, is on the same side of the boat: there are bulls everywhere and everybody purchases as it seems obvious at that time, even to the insider's eyes, that "the market can only go up". For example most of the Residential Mortgages-related traders in the US I know purchased houses as they were asked at the very same time to short the subprime market to hedge a coming drop in the house price and they all picked precisely the top of the market. Based on these grounds, I think that there's NO bubble at Dubai at the moment. I went there to the off-site with hundreds of Front-office colleagues (meaning investments and speculation bent people) and NONE of us would have bet a penny (so imagine the ranch...) on the future of Dubai, so it's totally overdone. Towers are built where there's a lack of space, here the guys built towers in the middle of the desert... What this trip told me this year, when there was lately some stress about the Middle-East sovereign debt is: even if it defaults, no one will lose the shirt there and the contagion risk will be limited. For the time being the United Arab Emirates are united and surprisingly or not, Abu Dhabi bailed out Dubai's debt and avoided the occurrence of a Credit Event on the Nakheel bond. Fortunately (or not), Dubai debt seems to be safe for now but on a purely speculative perspective, I would have considered a default as an opportunity to initiate some non-contagion strategies, buying as everybody sells. This said, we can't say "Bye bye Dubai" yet but it wouldn't be surprising if we see some of its juicy assets as the Emirates airlines or Dubai Ports fall under the control of Abu Dhabi shortly (if it's not already the case).
On the other hand, regarding the USD strength or more particularly regarding my old friend the EURUSD that went from close to 1.52 down to 1.43 in a couple of weeks and for which the action is discussed in a thread in the Hand of Scalpuman trading forums: if you follow my blog, you know that I have been pretty bullish on the EURUSD since this summer when it was close to 1.41. The rationale for this view was that despite the not so healthy Economy, the FED printing money and supporting the USD weakness with its Quantitative Easing Programs would feed the stock rally and the global recovery and it looks like I've had this right so far (see the related post, that one made my year profitable). Since March 09 we have seen a strange relationship between the risk aversion and the USD, the so-called "risk aversion play": on the one hand the USD weakness was linked to the rally, the recovery of the global markets and the risk appetite and its strength to the risk aversion. On the other hand in a perverse relationship, bad economic news fed the speculations that the FED would ease further (or longer) its cool monetary policy (Yo Ben, you're so cool), that led to a weaker USD that helped a further increase of the stock prices... Consequently, my long EURUSD and long stocks positions have been a winning duet for the whole last 2 quarters of this year... Wait! Almost the whole last 2 quarters actually... You probably know the story: as December began, after it retraced losses further to the Middle East stress end of Nov, everything seemed to be ruled out for the EURUSD to head to 1.55 without too much resistance on its way up. Of course that's when everything seems to be ruled out and the way crystal clear a trader needs to be the most cautious... On Dec. 2nd, for the first time in 9 months or so, the "risk aversion play" failed: as the Non Farming Payrolls (NFP) were much better than expected and that was positive news, the USD jumped, driving the EURUSD from close to 1.51 down to 1.49 in a few hours. One week after we saw that happen a second time as it seemed that the good US retail sales figure sent the USD up again. "Anything that occurs once can never occur again. But, should it happen twice, it will surely happen a third time." (Paulo Coelho, The Alchemist) and it may be the end of the "risk aversion play". The anticipation of the FED's moves seems to remain the main key to explain the USD action: on negative economic news the market used to anticipate the FED would ease further and it drove the USD down, now the positive news seem to feed the anticipation that it will tighten and that drives the USD up. This said and to mitigate this last point, we observed that the strong correlation between all the markets further to the systemic shock post-Lehman has tended to decrease since november and the EURUSD definitely suffered as well from its long US and short Europe nature as Europe was lately under big pressure (Greece, Ireland, Ukraine,...).
At that stage, my take on the EURUSD for the medium term (say a few weeks to months) is that we may be in a situation where both positive and negative economic news (what news may have an impact or not needs to be assessed further) lead the USD up so the rally we're experiencing could have steam. One of the strong hypothesis I'm formulating here is that the safe haven role of the USD would prevail on the market anticipation that the FED would ease in case of "bad" news.
Regarding my own trading and in a shorter term perspective, while I used to be long EURUSD for a while, I got out of my long position banking a small loss on a 3-month position and reversed my position to short and am enjoying a nice ride. That's the roller coaster of trading: I saw all the profits made in 3 months being long from 1.47 to 1.52 vanish in a couple of hours, and I made back those profits being short from 1.47 to 1.43 in a couple of days... The reasons why I reversed relied purely on Technical Analysis signals and my steps from long to short are detailed further in the trading discussions forum. In a few words:
- There's what I call the "Physics" of the prices: as a car at full speed needs to slow down and even stop before it can go on the opposite way, a strong move of a price in a single direction is very difficult to reverse. Trying to catch the falling knife is the most dangerous when the move is as strong as the one on the EURUSD and I've seen a few Fellow traders very badly hurt on this one.
- The 50-SMA has been holding the EURUSD since March (see the green circles on the chart above). There was fights around that moving average and it almost held with a doji-hammer candle on Dec. 7th, but the next day we saw the capitulation of the bulls and the 50-SMA broke "for good" . The landscape is pretty bearish since.
Now the question is whether I will keep on playing the USD rally for a longer term or not. To be frank, it's a bit too early and not totally clear in my mind and it requires more assessment. We'll see this next year as it's now time for me to forget about all this and enjoy the end of year with family and friends, and if you read this, I suggest you do the same, Fellow Trader and Merry christmas!
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