Posted by: Bevan | January 16, 2012

Contrarianism and Its Limitations

We frequently hear reports of how bearish market positions on Euro currency are at record highs, and that this is an ‘overcrowded trade’.  Certainly by traditional measures the Euro is extremely oversold – it is some way from the 50MA, and as is regularly reported Futures short interest is at a four year high (http://online.wsj.com/article/BT-CO-20120113-712186.html) with much media attention.  Twitter and the blogs have lots of talk of short squeezes.  I’ll admit that I expect a strong rally to test the short sellers at some point.  However I’ve been expecting that rally for weeks.  Looking at price with a trendline, in fact this is an extremely orderly downtrend, and as long as the fundamentals are in place these can continue for some time.

Looking at the trendline we’re not terribly oversold and many commentators actually believe that the Euro is still considerably overvalued, with market participants not sufficiently factoring in the likelihood of default, the serious contagious interlinks with Sovereign bond and CDS exposure throughout the financial system and the probability of a significant recession exacerbating problems.  To put it all in perspective, do a search for articles on overcrowded or oversold Euro.  You’ll find ones like this one on the excellent site Seeking Alpha written in early 2010 – we seem to have found ourselves in the same old situation again.

I look at it from a trend following perspective – there is no such thing as speculating that the price is too high or too low.  It is what it is, an orderly downtrend which certainly appears to be in line with the dismal fundamentals.

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