7 replies to this topic

[eminimee]

I posted this yesterday re: carry trade.

Yesterday, 09:13 AM

Post #6

Member


Group: TT Member*
Posts: 7933
Joined: 20-September 03
Member No.: 99



re yen carry trade. In my opinion...it may get unwound to a degree and that will help in the upcoming correction...but all it will do is get "reset" and put back on again. I seriously don't think it comes totally unwound on an interest rate move from .25 to .50.

I believe OEX will follow a similar pattern to what I've outlined while three things happen...1. The carry trade will get "reset" 2. the money will be heading back into the big boys...IE: OEX. 3.The OEX:SPX ratio complete the backtest and move higher to eventually move above the red parallel marked on second chart..that's when the recognition of wave 3 up kicks in .....hitting critcal mass to coin a phrase. The third chart shows the relative strength of RUT leading the charge out of the 2002 lows....I think those ratio's will soon reverse as soon as oex:spx completes it's back test. The safe bullish trade will be to short RUT and long SPX....you would have to figure out the ratio though...probably short 2 ER2 for every 1 ES. but I'm not sure. Maybe someone could chime in on that.

http://stockcharts.com/c-sc/sc?s=$OEX&p=D&yr=0&mn=7&dy=21&i=p46084252480&a=91757908&r=4938.png

http://stockcharts.com/c-sc/sc?s=$OEX:$SPX&p=D&st=1990-01-01&i=p29730383462&a=98616671&r=7975.png

http://stockcharts.com/c-sc/sc?s=$SPX&p=M&st=1987-01-01&en=2007-12-31&i=p57885915667&a=68755843&r=6086.png

[arbman]

RUT and NDX vs SPX and INDU shows quite a contrast. Either tomorrow the former two will join to the freefall nation of the latter two or there will be a phenomenal rally waiting back up... RUT and NDX did not correct as badly as SPX and INDU in relation to their historical volatilities. This could be the snapback because the former two historically underperformed the latter two during the 2006 rally. I would've expected the former two to be decimated on such a decline, they barely hit 3 standard deviations while the former two almost hit 5 standard deviations. Tomorrow will be indeed an interesting day in resolving whether it is a trading range or a severe IT downtrend. If it goes lower as much, we can discuss whether it is an IT downtrend or bear market too! The only chart you need to watch closely tomorrow is the USD vs the other currencies, mainly JPY... - kisa

[greenie]

Hi miniman, Carry trade has three components - (i) japanese interest rate, (ii) US interest rate and (iii) yen-dollar ratio. Any change in the above three can disrupt the carry flow. I agree with you that the rise of 0.25% interest rate, by itself, is not significant. However, the push it gives to yen/dollar contributes further to the complexity. Similarly, any sign of weakening in US economy will (a) reduce US interest rate and ( weaken dollar, and thus reduce carry trade. If you check the above three numbers around Feb 10, and then find out at what point the trades opened on or around Feb 10 will not be profitable, you can see the beginning of the unwinding to be right at hand. Any process of unwinding will have cascading effect, because it will reduce global liquidity at an accelerated rate (due to leverage involved), and hence reduce money flow to US real estate and junk bonds resulting in further weakness in economy, and back to the loop. I see a credit crisis spreading very fast. I do not know how you are seeing 3 of 3 point of recognition. Remember, this pyramid is built on credit (==leverage), not liqudity. Any loss will result in magnified loss. In the meanwhile, Fed will not reduce rates, and even if they do, it will be negative to the above carry-trade equation. That is the biggest fear at work here. BTW, based on my experience, 3 of 3 cannot be recognized so early, and that too by so many people. Never seen it happen. On the other hand, I have seen very good traders (like senorBS, who has one of the best trader in my book) looking for 3 of 3 in every move and confuse themselves forever. Best, Greenie

[eminimee]

Greenie....If OEX gets a weekly close south of 615...better make that 604 for confirmation....there is something else going on and a bigger drop is in store. Appreciate your comments.....

[arbman]

This entire turbulence is because of the faith of the USD, imho, the economy is apparently not doing so poorly, but the assets are worth as much as the currency, especially when the currency is trading near the historical lows. So, do you think the market is reacting to an impending USD devaluation? I think so. The US authorities went to China and they had a lot to talk about last year. It also coincided with the net outflows last Dec, then came the huge decline in the open interest while many expected another IT uptrend, then the breath started to deteriorate, then the Fed kept saying they might need to raise further the rates, then the USD started to decline despite the slowing credit growth and finally came yesterday's crash. Now, it still remains whether the USD will decline further... - kisa

[eminimee]

Quite frankly...."why" doesn't concern me in the least. I'm following my ewave...right or wrong....or let's say ...until wrong. I must admit...I pay no attention to fundamentals.

[Tokyo]

Quite frankly...."why" doesn't concern me in the least. I'm following my ewave...right or wrong....or let's say ...until wrong. I must admit...I pay no attention to fundamentals.

Hi Tea

I would like to comment about the carry trade, however, I have to go out in 10 minutes.

basically the politicians and central bankers want to avoid another LTCM-type of disaster to happen. it is not just FX market but the whole equities, fixed income, mortgage and commodities (including energy, metal) are involved into this carry trades. Also the carry trades have been popular not only among the hedge funds , institutionals etc but also among some Eastern European countries' mortgage system (they use Yen and Chf as far as I know)

I am not too sure if someone can get the rough idea of how big the size is for this entire carry-trade.

when I have more time to write, I will do.
good luck

[arbman]

Quite frankly...."why" doesn't concern me in the least. I'm following my ewave...right or wrong....or let's say ...until wrong. I must admit...I pay no attention to fundamentals.

Basically, if you want to know whether your equity index analysis (via e-wave, momentum or cycles), you have to first figure out where the dollar is headed...