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What to Do About the Euro Now

By Dr. Steve Sjuggerud
Friday, March 19, 2010

Three months ago, everybody hated the U.S. dollar...
The consensus was near unanimous. Investors were certain the dollar was doomed.
Where did investors put their money to avoid the certainly-doomed U.S. dollar? In euros...
We did the exact opposite... In my newsletter True Wealth, we bet against the euro in a very safe way. Readers are now up about 10% in three months.
But what's this? We're seeing a completely different situation today from what we saw three months ago...
Investors now HATE the euro. And they (surprisingly) love the U.S. dollar. Investors have bought dollars and short-sold euros in record amounts (even more so than a month ago). Take a look at how far the euro index has fallen since late November...
$XEU Euro Index has Fallen Far Since November
The extreme we're seeing is typical of turning points in a currency's trend. So I fully expect the euro to have a violent bounce to kick out all these short-term traders. The euro has already ticked up above its bottom in February.
Most people trade currencies with a huge amount of leverage. A couple-percentage-point move could wipe them out completely. And I expect it will.
So is it time for us to abandon our trade in True Wealth? This is a fantastic question...
It all comes down to your timeframe and risk.
If you're a short-term trader, trading with a lot of leverage, you need to get out of the trade now. The cards are stacked against you. Too many people are betting against the euro... They could kick off a violent rally in the euro as they try to get out of positions that are going against them. So I wouldn't fault you if you took the three-month 10% gain.
But if you have a longer-term perspective and you are not wildly leveraged – which is where we are in True Wealth – then you can just ride it out. A couple-percentage-point move is just a setback. (I could also be completely wrong about a violent move up in the euro... The historical precedent isn't 100% here.)
My two cents on the euro situation right now is that heavily leveraged bets against the euro will get wiped out, and soon. Then the euro will be back on its downtrend.
Good investing,

Further Reading:

Steve gave DailyWealth readers the rundown on his euro trade ahead of the second big leg down. Get his full argument – including the latest on the "Big Mac Indicator" – here: It's Time to Bet Against the Euro.
Whether you're in euros or dollars, you're missing what superinvestor Chris Weber calls the "greatest currency trade of the millennium." Find his favorite currency pick for the next 1,000 years here: The Greatest Currency Trade of the Millennium.

Market Notes


Last year, around this time, we were encouraging readers to take advantage of "rebound" trades, like gold stocks and emerging market stocks.
These assets suffered in late 2008... and classic traders' wisdom tells us assets that suffer the most in a decline tend to rebound the hardest during the subsequent rally. Our recommended rebound trades produced gains of more than 100%.
Nowadays, we find ourselves in a much different situation. Stocks have soared in the past 12 months. The benchmark S&P 500 is up 47%. Some sectors, like transportation and real estate, are up more than 70%. What's the contrarian – who likes to buy unpopular assets – to do?
Today's chart says, "Want something unpopular? Check out the utilities." Utilities are basic industries that produce electricity and clean drinking water. They grow at slow rates and distribute a good portion of their profits to shareholders. And while most every sector you can think of has gained at least 50% in the past year, the big utility fund, XLU, has returned "just" 24%... and many of its holdings pay dividends over 5%.

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