Right now there are two trades that are heavily crowded…
- Crowded Trade #1 – U.S. Dollar Bulls Reach Extreme
- Crowded Trade #2 – Euro Bears at Negative Extreme
In my opinion, the dollar bulls are fools to price in a series of gradual rate hikes over the next 5 years, specifically starting in the next few days here when the Fed meets.
The euro has essentially priced in a Greek default, so in my opinion it doesn’t even matter what happens to Greece now. The near-term worst case scenario is priced in already.
Oftentimes in markets, a round number in the headlines becomes almost like a divine destiny. Right now for the euro, the big talk is parity with the U.S. dollar. This is certainly possible, but oftentimes these headline numbers fall short… think gold $2,000, silver $50, or Dow 15,000 in 2008.
Without a further decline in the euro or a break below parity, a reversal in a crowded trade like this could unwind short positions very rapidly.
The last time euro sentiment was this negative we saw a 12% rally in six months vs. the U.S. dollar.
In order to profit from this speculative trade, FutureMoneyTrends.com is suggesting we buy shares in the ProShares Ultra Euro Fund (ULE). We should plan to hold for about 6 to 9 months, with a hard stop loss of 10%. Plan to take profits once you’re up 25%.
The leverage in ULE is that it doubles the return of the underlying trade. So if the euro rises 1%, we should see a 2% return. This also works in reverse too, which is why we want to keep a tight stop.
Looking at the parabolic move the dollar has had since July and the free fall the euro has been in over the past year has made this trade an extreme on both sides. So if your risk appetite is lower and you’d prefer to not bet that the euro will rise, consider buying PowerShares U.S. Dollar Bearish Fund (UDN) instead. Essentially, this is a bet against the dollar: if the dollar falls 1%, you will see a 1% rise.
With both of these trades, our downside is limited, first and foremost by a tight stop. But also looking at the charts and trader sentiment, the end is near for the dollar rally, and the worst is already priced in for the euro.
This week, the currency markets will be volatile with the Fed meeting, so if you are looking to get in early, now is that time! I believe the dollar trade is about to reverse, and when it does, it will be dramatic due to the extreme optimism in trader sentiment towards it.
Please make sure you either set a stop or have an exit price ready to go after entering this trade. If our timing is wrong, it is important to limit our losses.