Tags: Stocks | Driving | Carry | Trad

A Bottom for Stocks Driving the Carry Trade

By    |   Tuesday, 25 Mar 2008 02:33 PM

Finally, a breath of fresh air for the housing market!

Sales of existing homes in the U.S. unexpectedly rose in February to 5.03 million homes vs. the 4.85 million expected by economists.

This 2.9 percent rise over the previous month was a relief to the stock market, which rose 187 points on the news. This kind of immediate relief for battered stock investors has many believing that the worst may be behind us.

It's not that anyone thinks one month's worth of data proves that we're at a bottom. It just means that a bottom could be in sight. That's all markets needed to start buying up beaten-down home-builder stocks.

In fact, I've felt that housing stocks have been nearing their own bottom for a couple of months now.

Look at the S&P Homebuilders Index (XHB) and you'll see that it has finally produced a "higher low" and a "higher high" lately. That means new money is starting to trickle into this sector.

Remember, stock investors try to predict a turn in a sector and lead it by roughly six months. So if they felt that a bottom was coming in the next six months, then they'd start nibbling away at prices while they are still cheap and while everyone else is still scared. That's when the true values are found.

This is why they've started buying them up even now, before the market technically bottoms. It's because they know it's near. If they were to wait until the housing market actually bottomed, too many other investors would realize it and bid up prices. Much of the value would be lost.

With that said, where does that leave us as far as currencies are concerned?

Well, the euro vs. the Japanese yen currency pair, for instance, has a huge correlation to the Dow Jones Industrial Average.

So a rally in stocks, as measured by the Dow Jones Industrial Average, encourages money back into these carry trades, such as EUR/JPY.

A quick definition: "Carry" trades are where investors sell one currency with a low interest rate in order to buy a second currency with a comparatively high interest rate, thus realizing the difference as profit. Often, these trades are highly leveraged.

When stocks stabilize, carry trades like EUR/JPY tend to do the same and it becomes safer for the carry trade currency investor to creep back into them.

The existing home sales news appears to be putting a short term bottom in for stocks. Therefore, EUR/JPY is also bottoming out, at least over the near term. It formed a huge area of support around 153 yen to the euro, for instance.

A rally in stocks thus will encourage risk taking back into the carry trades, such as EUR/JPY.

You'll see the EUR/JPY rally minimally up to around 158. But if the stock market rally lasts for a bit longer, then you'll likely see it make it up to a resistance line around the 164-165 level.

Unless there's a wrench thrown in this recent optimism, you'll likely see the EUR/JPY head higher over the upcoming days and perhaps into weeks.

© NewsMax 2008. All rights reserved.

© 2017 Newsmax. All rights reserved.

   
1Like our page
2Share
SeanHyman
Finally, a breath of fresh air for the housing market!Sales of existing homes in the U.S. unexpectedly rose in February to 5.03 million homes vs. the 4.85 million expected by economists. This 2.9 percent rise over the previous month was a relief to the stock market, which...
Stocks,Driving,Carry,Trad
524
2008-33-25
Tuesday, 25 Mar 2008 02:33 PM
Newsmax Inc.
 

Newsmax, Moneynews, Newsmax Health, and Independent. American. are registered trademarks of Newsmax Media, Inc. Newsmax TV, and Newsmax World are trademarks of Newsmax Media, Inc.

NEWSMAX.COM
MONEYNEWS.COM
© Newsmax Media, Inc.
All Rights Reserved