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Go Long the US Dollar (UUP)

Posted By Brandon Clay On July 1, 2010 @ 3:00 am In Commentary,ETFs,Pick of the Week | Comments Disabled

When the stock market stumbles, smart investors look for alternatives.  These alternatives can be different asset classes like commodities or bonds.  The idea is to select a non-correlated asset so that when stocks aren’t performing well, something else will.  Another alternative can be shorting the market. Two weeks ago, we highlighted one of those shorts with Proshares Ultrashort S&P 500 (SDS) [1].  Investors in SDS have watched their investment appreciate since that time, while other investors lost their lunch money holding stocks long.

We don’t think the market is turning around in the near term.  In fact, there will probably be more volatility in the coming weeks.  On Tuesday, Treasury yields fell hard amid economic concerns.  The yield on the two-year note fell to an all-time low [2] while the 10-year note yield found its way back to April 2009 levels.  This is a bearish sign as investors look for safe havens.  Add to that anxiety about weakened growth in China and the slump in consumer confidence, and you have a skittish market.  Stocks are taking it on the chin.

However, it’s not always best to short a market in times like these.  A better move is to look for a non-correlated asset to help you weather the storm. Find alternatives outside of stocks that tend to do better in periods of uncertainty.

There are two reasons we think the US Dollar is the safe-haven of choice right now.  For one, the European sovereign debt crisis is far from over.  Ongoing worries about European liquidity capabilities continue to plague the market. This is causing even more traders to bail on the Euro.  The big winner turns out to be the Euro’s biggest competitor:  the Dollar.

Secondly, the Dollar has been a traditional shelter in times of market uncertainty.  As the market was reeling from the credit crisis in 2008 and 2009, the Dollar surged.  Conversely, when the market rallied starting in March 2009, the Dollar began its fall.  Right now, the Dollar is in a long-term and intermediate-term uptrend.  This up-pattern in the Dollar, as in the past, is inversely correlated to the market.

The best way to go long the Dollar is with PowerShares DB US Dollar Index Bullish (UUP).  This ETF is composed of futures contracts “designed to replicate the performance of being long the US Dollar against the Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc.”  You won’t get rich with UUP, but you should find some shelter from the headwinds of a down trending market.  Though longer term trends are positive for the market, the short-term isn’t inspiring.  That makes this a buying opportunity for the US Dollar.  To seek stability in a shifting market, buy the Dollar with UUP.

UUP Chart

Disclosure covering writer, editor, publisher, and affiliates: No positions in any of the securities mentioned. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.


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URLs in this post:

[1] Proshares Ultrashort S&P 500 (SDS): http://investwithanedge.com/rising-market-is-a-head-fake-short-with-sds

[2] yield on the two-year note fell to an all-time low: http://www.reuters.com/article/idUSTRE65S2SS20100629

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