When all is said and done, a lot more is said than done. What is far more important than what people are saying is what they're actually doing with their money. On global foreign exchanges, including the Chicago Mercantile Exchange, the largest speculative bets in history have been placed on a lower euro. One of the most popular hedge-fund trades today is borrowing, or shorting, euros on margin to purchase U.S. Treasuries and the U.S. dollar on margin. Regardless of the fundamentals of the situation, whenever there is a dangerously lopsided bet on anything, the financial markets inevitably do the exact opposite. Therefore, we are in the earliest stages of a major reversal of fortune during the next several weeks. The U.S. dollar index, which at 6:35 p.m. Eastern Time on Sunday evening of January 8, 2012 achieved its highest level (81.503) since September 20, 2010, will almost surely slump below 76. It could retest its October 27, 2011 bottom of 74.724, and could possibly slide even further back toward its August 29, 2011 low of 73.525.
The reason this is so important is that a retreat of 7%-10% for the U.S. dollar index will translate into an even greater percentage increase for most equities and commodities, especially for those which have become the most oversold and undervalued in recent months including the shares of most commodity producers. In sharp contrast, U.S. Treasuries will likely decline sharply. TLT, a fund of U.S. Treasuries averaging 28 years to maturity, has been supported for weeks above its 50-day moving average, and stands far above its 200-day moving average. A lower greenback will encourage especially foreign Treasury holders to sell; once Treasuries begin to retreat, it will be a long way down until they find support. U.S. Treasuries have also become far too popular with the mainstream media. Many hedge funds and momentum players bought them during the past several months mainly because "they're going up". Treasuries have also become a dangerously stale trade; most long positions were entered near all peaks during the past several months such as on October 4, 2011 and December 19, 2011 when Treasury prices achieved all-time highs and completed a double top. A stale, overly lopsided trade is even more dangerous than a freshly lopsided one.
After a very strong 2011, high-dividend and low-volatility favorites including utilities and tobacco shares have been notable underperformers during the first trading week of 2012. Gold mining shares, which had been among the poorest performers last year, likely bottomed in the morning of December 29, 2011. These assets are often among the earliest to change direction to signal a reversal of fortune for U.S. Treasuries.
As money comes out of U.S. Treasuries, among the greatest beneficiaries will be shares of gold mining companies and other materials producers, as well as related industries including steel manufacturing and sea shipping. Highly unpopular European bourses will rebound meaningfully from their emotionally oversold conditions. [Disclosure: I am long SLX, SEA, URA, VXF, GDXJ, VB, and EWG, in that order.] This equity rally will not last indefinitely; as soon as the U.S. dollar has slumped sufficiently to retest support, the greenback will begin a rebound which will initiate the next bear market for global equities and commodities. However, especially since so many amateurs and hedge funds have been reducing risk by selling equities since late July 2011, the imminent uptrend for stocks and other risk assets could be substantially greater than nearly all analysts are currently anticipating.
