Mr. Mario?s Big Surprise
ECB president Mario Draghi certainly let go of a lead balloon today.
Instead of announcing a 20 basis point cut in Euro interest rates, we only got 10.
The world blew apart.
The Euro rocketed against the dollar some 3.5% in minutes, the best gain since 2009, and one of the top ten moves of all time for the beleaguered continental currency.
US Treasury bonds crashed, giving up $3, and popping yields from 2.18% to 2.32%. Stocks fell to pieces globally. The Volatility Index (VIX) went through he roof.
Never mind that Draghi announced an extension of European quantitative easing by six more months to March 2017, or that the number of qualified securities for the central bank could buy was expanded.
All traders wanted was one more rally before yearend into which they could unload their sizable Euro shorts. When they didn?t get it, they panicked and stampeded for the exits.
It was your classic flash fire in the movie theater.
This is what happens when positioning in financial markets gets too one-sided. Risk managers talk about too many passengers in one side of the canoe. Everyone gets to go swimming.
That is why I quit rolling down the strikes on my Euro shorts three weeks ago, loathe to sell to much at the bottom. My one remaining short Euro position successfully weathered today?s spike, is still in the money, and only has ten trading until expiration.
The important takeaway here is that today?s moves were entirely technical, and had nothing to do with fundamentals, which always win out over time.
The meteoric move in the Euro did not occur because of a sudden burst of strength in the European economy. It didn?t take place because the ECB is raising rates.
So, I think this entire move is bogus. It is a typical December event, where all of the hot money wants to get out of the market within the next four weeks so they can close their books and start over again next year.
It is also a great lesson on what happens when you have too many hedge fund chasing the same few trades. It always ends in tears.
Which leads me to believe that the dramatic moves we saw today will reverse themselves shortly. Stocks (SPY) will soar, bonds (TLT) will rise modestly, and the Euro (FXE), (EUO) will take the express train downtown. The (VIX) will fade, again.
These gyrations could possibly take place as soon as Friday?s November nonfarm payroll report. All we need is a number north of 200,000, and it will be off to the raises once again.
I am so convinced of my convictions that I bought the Velocity Shares Daily Inverse VIX ETF (XIV) 30 minutes before the close (that?s the latest I can send out a Trade Alert and expect readers to have time to open and execute).
USE THE HEDGE FUNDS? PAIN FOR YOUR GAIN!
If you still hold a Euro short, keep it.
If you are underweight stocks, here is another fine entry point.
This is especially true for hedged European stocks (HEDJ), which have just opened an excellent entry point.
The (SPY) is only down 2.1% from its recent high, and off 3.7% from its all time high, hardly the stuff of bear markets, or even corrections.
