Monday November 21, 2005 - 11:28:27 GMT
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Black Swan Capital - www.blackswantrading.com
A mini-sentiment extreme?
“Values in the stock market depend on that little increment, that extra margin of buying or selling, demand or supply, that determines current prices.”
Marchand Sage, Street Fighting at Wall & Broad
As more and more players warm to the idea of a dollar bull market and the rationales we provided to our readers back in January, which included:
1) Improving dollar yield differential
2) Relative economic growth
3) A crystallized sentiment extreme against the dollar
4) The possibility the Bush Administration puts action behind “strong dollar policy” words and 5) An emerging view that a falling dollar won’t solve the current account problem
…we start to wonder if too many people aren’t now “too bullish” on the buck. Reading Barron’s this weekend we noticed this article, penned by economist Carl Weinberg, “The Unsinkable Dollar.” There is nothing new there, but there is a forecast of a dollar bull market carrying into 2007.
Now, we don’t dispute that said forecast by Mr. Weinberg may prove right; even though we know it may just as well prove wrong. The point is that we are seeing a one-way sentiment extreme for the dollar shaping up nicely. That usually means its time to start looking in the other direction for a trade. And as I indicated on Friday—we’ve already started looking.
Pure guesswork, based on sentiment (that foggy grey area between quantitative and qualitative), suggests to us a correction of the multi-week variety. As a text book example, it would be enough of a move to put a little fear into the Johnny-Come-Lately dollar bulls, in order to shake them off before another leg higher. But we can no better forecast a textbook example than we can the non-textbook type—so let’s call it a bet.
Open interest is high in euro, Swiss, and yen futures, as traders have added to their dollar longs it seems, as price action validated their view; it seems to us we are still far from the type of crystallized sentiment extreme we saw against the dollar back in late Dec ’04 – early Jan ’05. But we are moving down the dollar bull path a fairly steady clip. Tomorrow we will revisit the Currency Life Cycle, first published in Currency Currents on January 14th. Till then, be careful out there.
Black Swan Capital
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