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« Weighing the Week Ahead: What should we expect from Santa? | Main | Want to make money? Take off your ideological blinders! »

December 22, 2011


Angel Martin

Mike, thanks for the link. I agree with the author that there are bear markets that last for years where sentiment can be very negative all the way down (early 30's stock market is a classic).

What i don't agree with is his suggestion that there won't be any sharp 1000 point rallys in the euro. It's in bear markets where the fundamentals are really bad and sentiment is really negative that you get wicked bear market rallys - again the early 30's provided many classic examples.

Also, i'm looking for a euro endgame which is crash and disintegration, not just a long grind down like the depression era stock market.

For a crash, i know of no example where one happened when sentiment was overwhelmingly negative...

Mike C


Here is a note I think you might find interesting vis a vis the interplay of sentiment and fundamentals:

"Since topping above $14 during the summer of 2008, natural gas has entered a brutal bear market in which market sentiment readings have essentially been at rock bottom (highly bearish) levels for nearly two years while price has steadily been grinding lower.

We are now entering a potentially interesting phase for the euro ($EURCHF, $EURGBP, $EURJPY, $EURUSD, $FXE) wherein the euro remains mired in a significant downtrend while market sentiment is highly pessimistic (although not as extreme as natural gas) and speculative short interest is at multi-year highs"

Just my opinion, but I think it is easy to get too cute with sentiment stuff and overreach such that a joke passing around must mark a bottom of sorts (as the euro drops to fresh lows the last 2-3 days). I think it is instructive to see how far and how long natgas has fallen in the face of persistent bearish sentiment when the fundies such as supply/demand overwhelmingly support the bearish move.

Price-wise, we aren't even at the spring 2010 lows on the euro, and arguably the fundamentals are worse now compared to then. I think sentiment is more useful when price really is at some extreme (like SPX being at 670 and a 13-year low) whereas the euro is still only in the middle of a 5-10 year range.

Interestingly, recently we've seen U.S. stock strength in the face of euro weakness so maybe that 2+ year correlation has finally broken down.

Angel Martin

Actually, the $4 trillion is all FX trading, $US/euro is approx 30-40
% of that total.

Angel Martin

Jeff, thanks for responding to all these comments. It's really helped my thinking on the strategy of my short FXE trade. It's a good reminder that I need to look at sentiment as well as waiting for the eurozone politicians to exhaust all their policy options.

I am now convinced that you are right and the short euro may be a "crowded trade" even without a big move down in the euro.

One thing about the short euro, it is a short, not a long.

Some recent examples of "crowded trade" shorts would be the "short treasuries" trade in 2009-11, and the short SPY bouts of fear as measured by the VIX spikes in may 2010 and aug-oct 2011. At least with the SPY, it didn't move down much even though everyone overpayed for options to position for a big drop.

So, just because the euro hasn't moved down much, it can still be a "crowded trade" on the short side.

On trade deficits propping up the euro, I don't think that's possible as the $80 bil annual trade deficit with europe is dwarfed by the $4 trillion daily $US/euro trading volume.


Angel - As you know, my interest in the euro is indirect, since currencies are not part of any of my investment programs. As usual, my marketing department is behind the times -- at least according to the ads I see. Investors are invited to treat currency trading the same way they have gold -- as an alternative asset class. Since the average person has now been convinced that stocks, bonds, and real estate are all overvalued, what's left? :)

The euro/dollar relationship is a classic problem of needing a counterfactual. The dollar is going to decline as long as the US has a trade deficit. Without the European crisis, isn't it possible that the euro would be stronger versus the dollar?

Just a thought....


Angel Martin

Jeff, I am really confused about the sentiment over europe.

We do have a lot of doomer bloggers and talking heads forecasting disaster for europe. And very few join you in thinking the outcome will be better than disaster. That suggests crowded trade.

At the same time, the value of the euro has not moved against the dollar in a year - which is quite remarkable given everything that has happened.

When I think of the classic "crowded trades" where sentiment became totally one sided: March 2009, the end of the tech bubble, gold at the end of 1979 - there was a lot price movement consistent with the prevailing sentiment. For the euro there has been almost no price movement down at all. That doesn't look like crowded trade.

I understand there is (or was) a large short position in euro/$ futures which suggests a crowded trade. But the options on FXE are pretty cheap for a currency that conventional wisdom assumes is about to collapse.

That's a pretty mixed bag of contrary sentiment indicators, but I put a lot of weight on the fact that the value of the euro has not moved a lot - contrary to other crowded trade examples.

Jeff, I have a theory which is: there are more people that agree with you about the euro, but it's a hard argument to make in a short period of time, so they don't want to go on tv and be ridiculed by rick santelli et al.

I think if the LTRO program starts to work, we may see some more people dissent from the narrative that the euro is doomed.

However, for now, i will stick with my view (was crank, now conventional wisdom) that piigs insolvency = euro crash.


Angel -- I am not a big advocate of these impressionistic criteria, as I think you know, but I hope you enjoyed the joke.

I am also not a big fan of online polls, since the alleged "sample" is always biased. With that in mind, more than 80% of WSJ respondents think that the euro will be lower at the end of the year.

Putting aside the magazine cover question, do you really disagree that this is a crowded trade? Only now are we seeing a few who think that the end game may not be a total disaster.


Angel Martin

A bit late to this article, but this magazine cover provides a note of caution on the idea that the "Leno/magazine cover" indicator means that the story is old news and market top or bottom has been reached:

(hard to read but the cover date is Feb 11, 2008).

covers for feb 4 and feb 18 worth a look as well.


Nice. have a great holiday Jeff!


Proteus -- I follow and appreciate Bill's work, and thanks for highlighting this.

The VIX is one of the 18 elements in the SLFSI, and has been important in some of the recent changes. The VIX is difficult for most people to understand, despite education from Bill. A shorthand statement is that it is expected volatility as reflected in the prices of US equity options. Historically this is higher when there is a fear of declines, and normally concurrent with stock declines. The SLFSI captures a wider range or market data including fixed income markets. The changes do not necessarily coincide with stocks or the VIX, but it is not surprising to see a similar result.

Thanks for the link and the observation.



Ha, good one, I hadn't heard it. Brothels probably aren't even taking Euros in Europe. Is there anyone not short the Euro? And does that mean it has to get stronger? Or can everyone be right? Who's on the other side :)

On a different topic, have you seen the current vixandmore story on the VIX vs the St Louis Fed stress index? ( Any comments?

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