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This Year's Most Popular Trade Looks Ready to Blow Up

By Jeff Clark
Tuesday, May 28, 2013

 It's time for our annual "dollar bashing."
It's not intentional... not really. It's not our fault that every year, right around this time, currency traders lose their minds. Then they lose their wallets.
It has become a Memorial Day tradition. This year, though, it comes with a twist...
 During each of the past three years, the most popular trade on the planet – going into Memorial Day weekend – was to be long the dollar and short the euro. Traders were betting on Europe falling apart. That seemed like an entirely reasonable conclusion at the time. After all, Greece was threatening to default on its debts. Spanish banks were on the brink of collapse. Italy, Ireland, and Portugal were all facing liquidity issues.
But the world has a habit of not coming to an end. And popular trades have a habit of blowing up.
Back in 2010, we warned you the long-dollar/short-euro trade was going to capsize. And it did. The dollar fell 10% in two months.
In 2011, the dollar rallied 5% going into Memorial Day weekend. It gave up all those gains just one month later.
Last year, we once again warned that the most popular trade on the planet was going to blow up. Sure enough, the dollar dropped 6% and hit a new low for the year by the end of the summer.
Today, the dollar index is trading at its highest level in three years. Currency traders don't seem to care about the Fed's constant money printing eroding the dollar's value. They're buying the buck anyway. And this year, they're selling the yen.
 The Japanese yen has fallen to its lowest level relative to the dollar in five years. Take a look...
Japanese Yen (JPY)/U.S. Dollar (USD) Exchange Rate
In December, the Bank of Japan announced its own form of "quantitative easing" in an effort to reflate Japan's struggling economy. The move pushed Japan's stock market sharply higher over the past few months. But it has destroyed the yen.
The yen has fallen more than 20% in 2013. That's an enormous move for a currency. And currency traders are piling on. The most popular currency trade on the planet right now is to be long the dollar and short the yen.
Like the most popular trades for each of the past three years, this one is going to blow up. Take a look at this one-year chart of the yen/dollar exchange rate...
One-Year Chart of JPY/USD Exchange Rate
You can see the bullish falling-wedge pattern on the chart and the strong positive divergence on the MACD momentum indicator. If the yen can break the wedge to the upside and rally above 57, we could see a sharp and sudden rally that takes the yen up to 64 and maybe even as high as 72 over the next few months.
Currency traders on the wrong side of this move could get wiped out.
 So here's the bottom line...
Popular trades rarely work out. Over the past three years, currency traders have taken on huge positions being long the dollar and short the euro. And all those trades exploded on them.
This year, the most popular trade is to be long the dollar and short the yen. But we're entering a seasonal period of dollar weakness, and the chart of the yen has a bullish look to it.
This year's most popular trade looks ready to blow up, as well.
– Jeff Clark

In The Daily Crux
Market Notes
Dividend giant Procter & Gamble jumps to a new all-time high.
Japan's uptrend hits a wall... the Nikkei index drops 11% in two days.
Big Australia stock fund EWA breaks down to a five-month low.
"Private Equity" companies are booming... Blackstone, Fortress, and KKR are all up 50%-plus in six months.
Market Watch
Symbol Price
S&P 500 1649.60 -0.1% +24.9%
Oil (USO) 33.37 -0.5% -2.6%
Gold (GLD) 133.76 -0.6% -11.7%
Silver (SLV) 21.61 -1.2% -21.3%
U.S. Dollar 83.70 +0.1% +1.6%
Euro 1.29 -0.3% +3.1%
Volatility (^VIX) 13.99 -0.6% -35.1%
Gold Stocks (^HUI) 255.38 -1.3% -39.9%
10-Year Yield 2.01 -0.5% +14.2%

World ETFs
Symbol Price
Japan (EWJ) 11.41 -1.8% +31.4%
USA (SPY) 165.31 -0.1% +27.5%
India (IFN) 21.20 +0.3% +25.7%
Singapore (EWS) 14.01 -0.9% +24.7%
Israel (ISL) 14.28 -0.6% +18.9%
Taiwan (EWT) 13.76 -0.6% +17.9%
China (FXI) 36.56 -1.7% +14.7%
Canada (EWC) 28.00 -0.1% +11.4%
S. Korea (EWY) 57.13 -0.6% +11.0%
Russia (TRF) 14.63 -1.5% +10.8%
Lat.America (ILF) 42.04 -0.4% +8.3%
S. Africa (EZA) 61.77 -0.8% +2.3%

Sector ETFs
Symbol Price
Construction (PKB) 20.59 -0.2% +58.8%
Media (PBS) 20.76 +0.1% +47.7%
Financials (IYF) 72.64 +0.1% +38.7%
Health Care (IYH) 103.13 -0.3% +37.7%
Biotech (PBE) 29.69 +0.1% +35.8%
Defense (PPA) 24.57 +0.2% +35.4%
Consumer Svcs (IYC) 103.93 +0.0% +33.6%
Alt. Energy (PBW) 5.50 +0.9% +33.4%
Telecom (IYZ) 27.05 +0.3% +32.6%
Water (PHO) 23.00 -0.4% +29.3%
Industrials (IYJ) 85.01 -0.3% +29.3%
Transportation (IYT) 114.21 -0.4% +26.4%
Retail (PMR) 30.66 -0.1% +26.1%
Real Estate (IYR) 72.36 -0.4% +21.9%
Big Tech (QQQQ) 73.40 -0.1% +19.7%
Insurance (PIC) 19.01 +0.1% +18.3%
Nanotech (PXN) 6.95 +0.9% +17.8%
Software (PSJ) 29.80 -0.2% +16.1%
Basic Mat (IYM) 71.88 -0.4% +15.0%
Utilities (XLU) 38.83 -1.1% +13.3%
Semis (PSI) 15.84 -0.1% +12.9%

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