Monday, July 4, 2011

Dow Jones advancing too quickly? Tomorrow Euro may stall it.

Speaking of a rally. The Dow Jones raked in some awesome numbers this past week. Better then expected actually, and personally beyond my expectations. I mean we're talking about 500+ points since I wrote my last post about it struggling around 12k. The only issue here is and always has been is that whenever something like this happens (a rapid rise in any index) chances are it has a tendency to plummet just as fast a few days later. The same goes for this scenario. This US holiday the markets in the United States stood still, but not anywhere else in the world. A lot of news has been coming from the Euro zone for instance, and I'm not talking about the good kind. I still believe that sooner or later the euro will be either dropped by the weaker countries in the union or will vanish all together. For the sake of the European union and its people I hope, from an economic standpoint, this will happen soon. It's a big monetary mess across the pond that is weighing on not only the European economic block, but also the US and the world economy. First off, the Euro is incredibly over inflated.   It currently trades around $1.44 which is insane if you ask me. Goods from the Euro zone are expensive and noncompetitive in this global market, just as they can use the money from abroad.
But anyway, what does this mean for the US markets? Which stocks to buy, which to sell? Personally in a turbulent market like this I rather not focus so much on stocks or bonds, rather on ETF's that follow generally the outlines of the markets as a whole such as the DIA (the diamond) QQQ, (Nasdaq) or SPY (S&P). Now you can short these equities if you wish but in such a short scenario as this (meaning the pull back won't last very long) I recommend you start trading options on these ETF's, preferably ones with the closest expiration as possible (yes it's that soon!)

Above you can see how fast the Dow is advancing compared to a few months before. The classic saying goes; what goes up must come down, and in this case it's time to come down. How quick and how much depends on a few factors, how traders and investors alike cope with the troubles of the Euro zone tomorrow and other global events. Regardless it won't be positive. Some trading vehicles to keep in mind are DIA, SPY and QQQ, short them while you can, next week I'm sure we won't see 13k, or anywhere near it. Another one is the VIX, likely in a case like this the VIX (VXX) will spike, currently trading at an insanely low level (under 16) BUY people BUY BUY BUY! (again, like I always mention in almost every post on this site, a VIX level under 20 is a steal!) 
Forex: Short the EUR/USD or (FXE for ETF traders) ; when US markets kick in again, (large) banks, institutions and (private) investors will probably trade their Euros in for US Dollars which will set off the currency pair in a downwards spiral.

No comments:

Post a Comment


All opinions expressed, trade recommendations/advice on this website are solely of John van der Munnik and are not affiliated with any investment firm or any other organization. You should not make an investment only based using this website VDM Trading for your trading needs without seeking help from your own financial advisor.