The fortunes
of Europe's beleaguered euro currency have been heavily influencing US
markets. Both stocks and commodities have been battered down recently by
overwhelming euro bearishness. This has proven seriously vexing for traders
trying to focus on fundamentals. But the extreme euro pessimism worrying
everyone is actually very bullish. This loathed, oversold currency is due to
surge again.
Today of
course the great fear plaguing the euro is centered around
Greece. This profligate, unrepentant debtor nation seems hellbent
on not honoring its commitments to the rest of Europe which could force its
exit from the eurozone. And though Greece's economy
is immaterial relative to greater Europe's, traders are worried Greece
forsaking the euro will trigger other troubled debtor countries to follow
suit.
And if Greece
proves the initial domino that ultimately leads to the eurozone
fracturing, what is the fate of the euro itself? This compelling line of
reasoning has catapulted the short-euro trade to become the most-crowded
macro bet on the planet. There is a universal expectation the euro is doomed
to spiral lower, with only the magnitude of losses in doubt. This euro-to-zero
sentiment is immensely popular.
But
provocatively it is nothing new. Since the euro was born in January 1999,
every time it has been near lows similar euro-to-zero arguments were
ubiquitous. Yet the euro has still thrived, defying the naysayers every time.
In fact, between mid-2001 and mid-2008 the euro surged 90.5% higher in a
mighty secular bull. Even this week near new interim lows, the euro was still
up 50.5% since its bull began!
The euro's
rise to prominence has been meteoric. Today it is the world's second-largest
reserve currency and second-most-traded currency. It now has more physical
money in circulation than the US dollar! It is used by 330m Europeans daily,
and another 175m people use currencies pegged to it. The euro continues to
grow in acceptance and even preference by countries, central banks, and
companies.
The euro is
not going anywhere, the world needs a viable
alternative to the US dollar. This is especially true in light of the Federal
Reserve's relentless dollar
inflation and Washington's Greek-style rampant overspending. Whether
Greece stays in the euro or not is truly irrelevant. Back in 2010 before its
worst woes began, Greece only accounted for less than 1.9% of Europe's GDP.
Today it is a rounding error!
To put this
in US terms, the states of Indiana and Minnesota each account for about 1.9%
of US GDP. If one was to secede, stop using the US dollar, and print its own
currency, would the US dollar be doomed to fail? Of course not. Greece
doesn't matter and never has, it isn't big enough to
be material. Whether Greece stays in the eurozone
or not, the euro itself will continue to thrive as the dollar's major
competitor.
And if the
euro's existence isn't threatened by Greece's intransigence, then today's
euro lows are merely a normal market event to analyze. Like everything else
the near-future performance of this embattled currency will be driven by
sentiment and technicals, while fundamentals
determine its long-term fortunes. And if you can step back from the
wildly-overdone Greece hysteria, the euro is due to surge.
This chart
looks at the euro priced in US dollars over the past 4 years or so, since
before late 2008's stock panic. The euro (blue) along with some key technicals are slaved to the right axis. On the left in
red is a construct I call the rEuro, or the euro
divided by its own 200-day moving average. Based on my Relativity
trading model, it helps identify the euro's tradable sentiment extremes
of unsustainable greed and fear.
![](http://www.24hgold.com/24hpmdata/articles/img/20120526CLA08141.png)
Since late
April, the euro has plunged by 4.9% to just under $1.26. This sharp move
lower was mainly sparked by early May's elections in Greece, where a
radical-left political party shocked the world by winning about 1/6th of the
popular vote. This SYRIZA (Greek acronym for Coalition of the Radical Left)
party wants to nullify Greece's bailout agreements with Europe and grow
Greece's government again.
As this chart
shows, a $1.26 euro is very interesting technically. Ever since the stock
panic, this has been the euro's major long-term support zone. Each
time it plunged to $1.26, it soon rallied sharply in a major new upleg. Whenever the euro approached today's levels in
recent years, traders got caught up in the downside momentum and expected
this currency to spiral even lower. That was the wrong bet to make.
Back in July
2008, the perennial euro-to-zero fears were a distant memory. The euro was
achieving all-time highs against the dollar, which itself was mired deep in a
long secular
bear. But the euro's revelry was interrupted by something amazing, a rare once-in-a-century
stock panic erupted out of nowhere. This terrifying event ignited the highest
levels of fear we'll see in our lifetimes, a literal fear superstorm.
In just a
month in October 2008, the flagship S&P 500 stock index plummeted an
unbelievable 30%! Investors and speculators around the world rushed for the
exits, cashing out to end the pain. So the US dollar rocketed
higher. The benchmark US Dollar Index soared 22.6% in just 4 months, its
biggest and fastest rally ever witnessed over such a short span. The
dollar was the world's safe haven of choice.
Well
unfortunately for the euro, it dominates the USDX at 58.6% of this index's weight.
So with flight capital catapulting the dollar higher, the euro had to fall.
And it did, plummeting 22.0% in just 7 months from its July all-time high. In
October and November 2008, on the exact days the US stock markets hit
panic lows (driving dollar buying), so did the euro. Popular consensus argued
it wouldn't survive.
But the
euro-to-zero crowd, as usual, overlooked a critical point. The world needs
a direct competitor to the US dollar, and for better or worse the euro is
it. Central banks need to diversify away from their heavy dollar holdings
built up over decades. Countries and companies that don't like Washington's
disastrous mismanagement (rapid inflation, rampant overspending, zero yields) of its currency need an alternative.
So the
wildly-oversold euro soon started surging again, right from $1.26ish levels
where traders were wrongly hyper-bearish on it. This fast euro recovery was
mostly dollar-centric. As the US stock markets stopped plummeting and
bounced, flight capital hiding in the USDX quickly exited. And the falling
dollar quickly pushed the unloved euro higher. The euro couldn't stay near
its major support for long.
But it did
revisit these deep lows again in early 2009. While the stock panic was over,
US stocks slumped dramatically again as the openly Socialist (theft via
taxation) and Marxist (class warfare) Obama Administration haughtily asserted
that American investors were undertaxed and
the federal government was too small! So once again flight capital poured
into the US dollar, forcing another plunge in the euro.
This second
$1.26 approach in March 2009 just as the US stock markets bottomed is very
illustrative for today. Even though the euro's initial attempt to launch a
new upleg just after the stock panic failed, its
strong support held and formed a double bottom. So just because the
euro has approached this major support line twice so far in 2012 certainly
doesn't mean a major euro upleg isn't imminent
again.
The euro
would ultimately surge 21.4% higher in 12.2 months in 2009's major upleg, ridiculing the euro-to-zero naysayers whose ideas
were so popular during the stock panic. But by then the euro was overbought,
it was trading above 1.08x its 200dma. As the light-red rEuro
line in this chart shows, once the euro rallies fast enough and far enough to
hit this metric a correction is due to rebalance sentiment.
Currencies
are just like stocks in that excessive greed (after major uplegs)
and excessive fear (after major corrections) can never persist. Emotional
extremes soon burn themselves out and the great sentiment pendulum slowly
starts swinging the other way. So the euro's correction in early 2010 was
totally normal until the first round of Greece fears hit. And then the
decade-old euro perma-bears gleefully reemerged.
In order to
join the European Union, countries have to agree to keep their budget
deficits under 3% of GDP. Obama would never make it,
he has been irresponsibly and recklessly running US deficits in the 8% to 10%
range! In early 2010, the world learned that the filthy Greek politicians had
outright lied about its deficit. Instead of the 6% claimed (already a
problem), Greece's deficit was nearly 13% of its GDP!
So the
already-correcting euro started to plunge, with Greece's profligacy creating
a crisis of confidence in Europe's composite currency. In May 2010 Europe
approved a massive €110b bailout package for Greece, but it wasn't
enough. The euro kept on plunging well below its $1.26 major-support line. By
the time the dust settled in June 2010, the euro was trading at just $1.19.
Everyone thought it was doomed.
Except a
handful of contrarians, including me. When any price has already corrected
for a long time, and then starts falling sharply, fear quickly balloons to
extremes. But this very capitulation is incredibly bullish, as everyone
susceptible to being scared into selling anytime soon is forced out. That
leaves only buyers, so a price soon starts surging after such a plunge. The
euro looked really bullish, even with its support broken.
I wrote an
essay on this in late-May 2010 called Euro Panic
Buying Op. The day it was published the euro was under $1.26, and the
euro-to-zero crowd dominated discourse. There were widespread predictions the
euro would fall to parity soon ($1.00), far lower than it was trading.
I took the unpopular contrarian position then, as I am now, that the
hyper-oversold euro was due to surge. I wrote...
"Today's
radically-oversold euro is one of the most extreme low-price anomalies I've
ever seen. I can't imagine it not reversing soon and violently, with the
resulting euro relief rally being blisteringly fast just like it was in early
2009. This has huge implications for commodities stocks, as the rallying
dollar and falling stock markets have really depressed them lately."
The deluge of
hate mail I got after that essay was dizzying. Was I blind? Dumb? Naive? All
of the above? Couldn't I see that Greece was going to drag down the euro, and
that Italy and Spain were next? Clearly Europe was plunging into a perpetual
recession and the euro was doomed! At major lows, it is almost
impossible for the great majority of traders to fight the incessant
groupthink to buy into fear.
But the few
other contrarians and I were right, the euro would rocket 24.5% higher over
the next 10.9 months in a massive upleg just as
predicted. If you want better perspective on the euro-to-zero hype today, I
encourage you to find what your favorite euro bears were writing back in
May 2010. Did they wrongly expect the euro to plunge from lows back then
too? If yes, why trust their herd mentality now?
After that
massive upleg born out of extreme fear and despair
much like today's, the euro eventually grew
overbought again in spring 2011. Greed was excessive, sucking in everyone
interested in buying anytime soon. This left only sellers so the euro started
correcting again. And just like in its 2010 correction, once again Greece
fears flared to help accelerate this latest correction's decline late last
year.
By February
2012 Greece's continuing rampant government overspending had spawned such an
insurmountable debt burden that the other European countries approved a second
€130b bailout package. I couldn't believe it. If the Greeks couldn't
get their act together after the first massive bailout, why throw good money
after bad? Europe should have just kicked Greece out of the eurozone.
This latest
round of Greece fears drove the euro near $1.26 support in mid-January, and
again this week after the Greek government that agreed to the terms of the
second bailout lost this month's elections. So traders are once again
terrified by little, immaterial, perpetually-broken Greece. What if it leaves
the eurozone to fire up its dusty drachma printing
presses again? How can the euro weather such a crisis?
So the same
old euro-to-zero arguments that have come out of the woodwork at every major
euro low since its 1999 introduction have reared up again today. After
correcting 15.1% in 12.7 months, rather than seeing a mature correction and
oversold euro traders and analysts are jumping on the downside-momentum
bandwagon again. They fully expect the euro to continue selling off, maybe
hitting parity.
But once
again I'm taking the contrarian side on this one. When everyone thinks
a price that has already suffered a long decline is heading lower
indefinitely, they are almost always wrong. The euro is nearing oversold
levels and fear is out of control. Euro shorts are
everywhere, hedge funds are heavily short this currency just like they
wrongly were in spring 2010. And euro bulls are scarce, seemingly extinct.
So the
oversold euro is due to surge, probably to enter a major new upleg. And the last two major uplegs
after extreme euro fear near its $1.26 major-support line have averaged 23.0%
gains over 11.6 months each. A similar upleg today
would carry the beleaguered euro up to $1.55 by next spring, which is not far
from its all-time highs. This would certainly send the euro-to-zero crowd
scurrying into hiding again.
But even if
similar performance proves elusive as Greece's increasingly-likely euro exit
is discussed in this coming year, the euro is still due for a major rally.
Its major resistance line of recent years is currently at $1.42, and dropping
by about $0.04 per year. So by autumn this resistance zone will be near $1.40
or so. This would net a conservative 11.1% rally for the euro in the coming
months, with huge implications.
Ever since
the stock panic, there has been a strong negative
correlation between the US dollar and US stock markets. So whenever
traders see the dollar rally, they tend to sell stocks while futures traders
definitely dump commodities. The recent sharp May plunge in both the US stock
markets and commodities prices is the direct result of the fast-rallying
USDX. And that was driven by the Greece-induced euro plunge!
So when the
euro reverses out of today's extreme lows and starts surging higher, the US
dollar is going to get hit hard. All the selling pressure on stocks
and commodities will evaporate immediately. And all the capital hiding out in
the dollar will start flowing back into these oversold arenas. So euro
strength will effectively spark major rallies in stocks and commodities,
starting to rebalance May's rotten sentiment.
And when both
stock markets and commodities recover, the biggest beneficiaries will be the
hyper-oversold commodities stocks. The carnage in this sector has been
unbelievable lately, with many commodities stocks nearing panic levels even
though the prices of the commodities they produce and their profits are far
higher today. The imminent surge in the oversold euro should quickly reverse
this.
At Zeal we've
always been contrarians, because that's the only way to build fortunes in the
stock markets. The only time prices are really cheap is when everyone fears
they are doomed to fall lower indefinitely. That is the time to buy! And the
proverbial blood is flowing in the euro streets today. When it inevitably
reverses, the US dollar will fall igniting sharp rallies in oversold
commodities. Gold will benefit the most, and gold stocks just suffered a
full-blown capitulation
driving them to panic-like lows.
The bargains
in this sector are amazing, and we've been adding gold-stock trades in our
acclaimed weekly and monthly newsletters. In
them I draw on our vast experience, knowledge, wisdom, and ongoing research
to explain what the markets are doing, why, where they are likely heading,
and how to trade them with specific stock trades as opportunities arise. Subscribe today and take
advantage of the oversold euro to buy commodities stocks cheap!
The bottom
line is the euro is due to surge. Greece's long-known dysfunctionality
has driven the euro to major multi-year support again. But these levels have
held strong even through and since 2008's stock panic, the greatest fear
event of our lifetimes. Whenever the euro falls this
low, it is oversold and fear is excessive. Like anything else suffering such
extremes, a sharp rally soon erupts to rebalance sentiment.
So the smart
bet to make today is the contrary one, fighting the euro-to-zero groupthink
and being long this battered currency. Sooner or later some catalyst is going
to drive some euro strength, which should ignite a monster short-covering
rally to kick off the euro's next upleg. The best
part is this will hammer the overbought dollar, paving the way for capital to
return to oversold stock markets and commodities.
Adam Hamilton,
CPA
May 26, 2012
So how can you
profit from this information? We publish an acclaimed monthly newsletter, Zeal Intelligence, that details exactly what we are doing in terms of
actual stock and options trading based on all the lessons we have learned in
our market research. Please consider joining us each month for tactical
trading details and more in our premium Zeal Intelligence service at … www.zealllc.com/subscribe.htm
Questions for
Adam? I would be more than happy to address them through my private
consulting business. Please visit www.zealllc.com/adam.htm for more information.
Thoughts,
comments, or flames? Fire away at zelotes@zealllc.com. Due to my staggering and perpetually increasing e-mail load, I
regret that I am not able to respond to comments personally. I will read all messages
though and really appreciate your feedback!
Copyright 2000
- 2012 Zeal Research (www.ZealLLC.com)
|