Summer Sales on Shorts Soon ???

Well, let's say the things are not really going for the best for my short stock index position initiated on June 29th... It started not so badly and I made a 1-ATR (Average True Range) paper profit before the stocks initiated a rebound on July 7-8th which has some kind of strength. I don't want to face a train coming (I've already taken too many of them, it's a bit unpleasant each time) and for now got out of the position with a loss equivalent to around -0.5 ATR. That's a so-called "whipsaw stop" : while for a given position my risk is of 2-ATR, I believe I'll be better off taking a loss between -0.5 and -1 ATR and get back to the position when (and if) the price comes back to my initial traded price rather than having a 2-ATR stop. I'll have a higher percentage of losses but I expect to have a better expectancy. Keep in mind : focusing on a high percentage of winning deals is a mistake and any percentage above 60-70% should be watched suspisciously as it probably means that the profits are taken too early and ultimately a few huge losses will wipe you out.

Now, back to the bearish view I've started to develop : the more the things go, the more I'm convinced that the mistakes from the past (meaning the Great Depression) are repeated : focus on a balanced budget and on deficit cuts while the economy is still weak, the unemployment high and I think that ultimately if we don't change that, we will return to recession soon. I think Obama has it right and growth has to be priviledged but I'm afraid that he came to a political dead-end and won't be able to support the economy further as it should be. Back to 1932, Roosevelt managed to devaluate the dollar breaking the then sacrosanct gold standard against everybody including among his advisors, the FED, the Treasury and the whole world. Today, Obama lacks the strength to impose more support and to save the world from a double dip recession. The current rally seems to indicate that the time has not come yet for the slump and that I'm probably too early in my short position, but my scenario, which I sincerely hope is wrong, can spend some time to confirm itself and I want to build my position progressively. One week ago I had the feeling, maybe wrongly, that around me, the whole world was bearish and further to the recent rally, the crowd may now be more divided (I start hearing more and more bulls), cheapening the short positions. This said, if the rally is fed by the expectations of a good earning season, I'd said that a lot of it is being discounted now and frankly I can't see outstanding results with a strong dollar, the EURUSD was below 1.30 during most of the quarter : it might soon be summer sales on the shorts!

In the meantime, I've recently missed a good opportunity on the Forex as I was focusing mainly on the stock markets : it concerns the EURUSD for which I was pretty bullish and still am. My argument to bet on a rise of the pair used to be that on the one hand with European (Germany particularly) tightening and putting efforts on "Austerity" while on the other hand the US wants to keep it easy and favours growth, and that fundamentally would drive the pair up. This argument is not really valid anymore because the advocate of supportive stimuli isn't the US but Obama, and as we discussed above, he struggles to impose it. My argument in favour of a rising EURUSD now more lies in the market action. Remember last winter, in Dec 09, we had been used since March that year to assume a strong correlation between a rising EURUSD and a rising stock market, it was what we called the risk aversion / appetite play. Remember ? In December, the EURUSD was above 1.50, and it seemed like nothing could stop the pair to reach the 1.55-level and above. Suddenly the December Non-Farm Payrolls (NFP) posted a positive surprise (less job cuts than expected 5-11k vs -126k expected) and as expected the stock market jumped but at the very opposite of what we were used to, the correlation between EURUSD and stock markets broke and the currency pair began its slump from 1.50 to 1.42 then to 1.20 with the stress in the euro area in 2010 as the health of the US economy at least compared to the European ones, was reflected in a strong USD. To me, what happened on July 1st after the ISM manufacturing is a bit reminiscent of, or more precisely mirrors what happened after the NFP in December 09 : for months we have been used to see the EUR fall with the stress on the european sovereign debt and to a large extent, we (me at least) associated again the EURUSD to the stock markets in once again a kind of risk aversion play : the EUR falls and strengthen with the stock markets. On July 1st, the ISM manufacturing data showed a negative surprise, sending the S&P 500 to a bottom and in the meantime the EURUSD jumped from 1.22 to close to 1.25 and it reached 1.27 as I'm writing a few days later. The correlation broke once again and this could signal a strong move of the EURUSD upper (1.30, 1.40. 1.50 ???) as the european troubles potentailly to come could have been already discounted and the world could focus bad on the not-so-strong US economy. We could be in a situation where concerns about Europe ease and the EUR strenghten or the concerns about US deepen and the USD weakens, in both case that would favour the EURUSD. If I'm right I may have missed an opportunity but it's not too late : a long EURUSD could be a perfect addition to my short in equity indices...

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FYI As this post is published: SPX 1073 // SX5E 2681 // NKY 9585 // DAX : 6069 // EURUSD 1.2637 // USDJPY 88.46 // XAUUSD : 1212