The term "carry trade" is often used in the foreign exchange markets & refers to a strategy in which foreign exchange traders sell the currency of a country with low interest rates & buy a currency of another country with higher interest rates. In layman terms, they are attempting to earn the difference between the two rates.

The "dollar carry trade" is an extension of that strategy & has moved well beyond a trade solely between two currencies. Institutional investors have implemented a more expansive carry trade strategy with other assets such as stocks, bonds, and commodities. This has impacted the market for at least the past 6 months and could impact it in the months ahead. Simply put, it’s one of the main reason stocks and other risky assets have been rising. Institutions can short the dollar in the currency futures market & use the proceeds to buy assets or currencies that can potentially provide a higher return.

The reason is very low interest rates in the U.S. due to uncertain economic conditions and central bank policies make this trade possible. By keeping interest rates low relative to other countries, the Fed has allowed the dollar carry trade to unfold. The dollar has become a "funding currency' being used to fund investments.

The impact is downward pressure on the U.S. dollar, support for the U.S. stock market, commodities and other risky assets. This phenomenon won’t last forever. Institutions will change course only when forced to cover when the dollar upward counter-trend begins, or if they believe U.S. interest rates may rise. Until this happens the Bulls have the edge. I hope this helps.

It's the greater fool game twofold. As long as we get in early enough on each side there is oodles of cash to be made. Of course, we are relying on the assumption that we ourselves are not fools.

Sentiment remains skeptical, so use this heavy doubt among investors ( as well as some members on this site) as fuel for a longer term uptrend that could continue to much higher levels. First thing, the markets need to get back in gear for the near-term and show some relative out-performance to the blue-chips. S&P level of importance is 1116.47, use caution not pessimism.

Hey optimism,

What do you think of the recent 50% retracement of the S&P and DIA over the past 2 years (basis weekly chart)? I thought I read one of your posts mentioning the 50% line which we're hovering at now (and the 62% line for the QQQQ). My wonderment is whether we're going to have a setback here. It could be of a proportion to send folks into the bushes to hide. THEN it will be time to buy like nobody's business………………but of course, like Ernie Harwell used to say after a called third strike "he stood there like the house by the side of the road"……….while the stock market passed him by. So I'm accumulating cash here, but i don't want it to burn a hole in my pocket.

Thanks for reminding us of sector rotation. I'm looking forward to some safe, high yielding utilities.

Some pundits say, "the incredible strength of the market can NOT be explained using the current economic backdrop". This in turn prompts advisers to issue negative market comments that are eagerly gobbled up by the doubting masses. Don’t you love it?

It’s this kind of chatter that keeps the market going. Higher prices gradually convert the bears to bulls & eventually the sentiment reaches a point of too much optimism. We are NOT there yet. The real top to the uptrend won’t come until the news and opinions are largely bullish, coupled with positive economic and corporate news, which appears to still be a long way off. The dollar and the implications that it has for other securities is the current excuse, but it’s a lot more complicated than that.

Stick with what works (Gold, Oil etc.) The charts will signal when it’s time to step to the sidelines. Use caution, not pessimism.

I'm still believing gold will break 1200 in 2009 and oil reserves are starting to shrink, I'm in agreement with opti on these.

Caution is now advised. We all know the market can turn on a dime. Case in point:

The S&P recently kissed the Fib 50% retacement line where it met resistance, & even though prices moved higher the MACD is losing momentum. It is still positive but it's important to watch to see if it can stay that way. A negative cross could send the S&P back near its Fib 38.2% retracement level at approx. 1016. When looking at the S&P chart it clearly shows a pattern between the highs. This pattern shows a pop followed by a drop with an average time span of just over 20 days. We are around day 21 at the top again & history may repeat itself.

Oil has problems as soon as it approaches the $80 mark. As long as it stays above $75.5 the bulls have the advantage. I am using dips to buy.

Gold is clearly in a bull market with a 12 month target of $1,300. Near term it may have a pullback & I'm hoping it does. Using Fibs counting from the top down, levels to watch are 1123 (23.6%), 1104 (38.2%), 1089 (50%). Pullbacks offer buying opportunities. 

Hi dmanson,

I use GLD & GLD options as trading vehicles that closely track Spot Gold. I am hoping for a pullback to just above 105 before considering any new positions. If already long GLD congrats,  it's still a hold until it has a 2 day close below 112. In case your wondering, it closed just above 112 yesterday. Let's see what happens in the next few days.

Post edited 3:23 pm – November 19, 2009 by optimism

Hi Darrell,

It doesn't matter what "I believe" or that "many people are calling the start of a correction today". Most people are wrong most of the time in predicting the market. I keep it simple and follow charts. In post #228 on this thread, I pointed out the red flags on the S&P.

If the S&P's daily basis MACD turns negative (that's an if) coupled with the other red flags, I may raise some cash. I may also use the opportunity to short the S&P and/or buy SPY short term puts. I say short term because we have seen several recent pullbacks only to bounce back higher, averaging 21 days. I'll do what the market tells me to do. For right now, I'm neutral until my hand is forced.

I'm staying long GLD, if it breaks & closes 2 days above 113 it could run much higher. If it closes 2 days below 112 I'll take some off the table & look to dip my toe in again at 105.

Thanks opti, I'm staying long and looking for more ventures. I love the micros, smalls and juniors.

Thanks opti. There are a lot of rules out there for making money in the market and I've always had trouble following rules.

If you just focus on one rule, "be in the market when it's going up and get the hell out when it's going down", you can do quite well. Even someone like me who makes lots of other mistakes.

The problem is figuring out the market diretion. Opti, you hit the cover off the ball on that one.

Would you call today a bullish day? Initially, my portfolio was up as much as 9% but by the end of the day, I was down by about 1% even though the S&P 500 is still up 1.3%. Small caps is definitely underperforming the general market at this point.

In regards to rotation:

Once the media starts to focus on any particular area, it's often late in the cycle & opportunities become limited. The focus should be leaning more towards the out-of-favor but improving sectors, such as Health Care & Consumer Staples, instead of chasing what's hot at the moment.