Tuesday, February 16, 2010

What a Difference a Day Makes (2/16/10)

I shared in my February 4th post 'What's Going On?' what I felt was the cause of the abrubt downward turn in risk assets:

My thought... I think the legit issues within the Eurozone are causing some 'dollar shorts' / 'risk asset longs' to reconsider (or forced to unwind) their positions. As detailed back in November's post (Did We Learn Anything? Carry Trade Edition), any shift in sentiment has the potential to move markets dramatically as so many levered "investors" have piled in on the same short dollar trade. Once an unwind of any carry trade begins, there is the potential for a pretty bad feedback loop.

My guess is that things (assets / non-USD currencies) will bounce back from here over the short-run (bought some pretty cheap options for a short-term rebound), but if it doesn't... things may get VERY ugly, VERY quickly.

While my explanation may or may not be correct, it looks like things "bounced" vs. "got crushed" for the time being (I am officially out of my short-term rebound trade, though I am continuing to hold some strategic long positions in gold, commodities, and non-USD currencies).

Not quite the opposite of what we saw during the February 4th or February 8th sell-off. At that time most of these ETF's were negative. Today ALL of them rallied.

Source: Yahoo

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