More currency/equity stuff

Here’s a graph of the US$ v other currencies in the dollar index (mostly euro, yen) over the last two days up until now (just before market open)

It is a direct inverse of the action of the US stock market — except that the stock market is closed (and thus gaps on open to “fill in” the currency action that has occurred in the interim).

This does confirm to my eyes that currencies are driving everything here. But with the dollar up (and pre-open indicating a large stock market opening gap down); I am clearly not guessing currency moves right — except for the yen which is stronger than the dollar. In particular, the euro is sucking wind right now.

I think I am trying to be too cute here with currencies/cash. The euro/pound/etc were overbought – and their fall yesterday cured that overbought condition — but things did not move all the way to oversold or near oversold. Since I am pretty much a “long-only” person (I can’t short in my accounts – and don’t like margin leverage – and despise “short” ETF’s since they are not what one thinks them to be); I am going to need to lower my “buy points”.

What does this mean? Basically, it means stay in dollar-cash unless/until oversold or near-oversold conditions exist in other currencies. Don’t try to follow a trend that is already pretty well-established — because in this market, that means the trend is about to reverse or get so damn choppy that it is hardly a “cash” option. Only buy when a particular asset is beaten down into oblivion. Even if it means that my long-dollar-cash is getting pecked to death in the interim.

My basic rationale here re currencies/cash is still valid — diversification of the cash component of my portfolio is important because currencies are the ONLY non-correlated asset left. But I can’t just immediately jump into diversifying across currencies without observing how they move over time. The current stresses on central banks and sovereign governments and other currency issuers are just too much. And things are likely to get worse before they get better. Plus, currencies are one area where traders get leveraged to the hilt in order to try to turn small moves into big profits (and losses when wrong). That’s why currencies are so volatile right now and why they are driving everything else. I need to respect that and fear that.

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