My Big Bets

17 Feb 2015 01:05 GMT · Time Estimate: 3 minutes ·

AUDNZD - As you all well know, I have said this is my trade of the year. I have been trading in and out on the long side since early January and will continue to do so. Still, we have yet to see the formation of a base, with the market content on making new lows. And yet, the profits have been there. After seeing a surge a few weeks back, I lightened up my long from just over 1.0500, with the hope of building back in on another pullback. And so, on Monday, the pullback came, with the market dropping back below 1.0400 on the stronger New Zealand retail sales. My current position is long 1.0356 at a little less than 2X leverage and I am quite excited with the average cost. The fact that the New Zealand data was stronger is really of no consequence in my view, with the more important focus on where the RBNZ is with policy and if it is still perhaps too restrictive. I believe the RBNZ is too restrictive and will continue to need to move to easier policy at a more aggressive rate than the RBA going forward. I also believe that with US equities so vulnerable at current record high levels, any sign of weakness here will expose the risk correlated New Zealand Dollar. So I am betting on a bottom in this market over the coming weeks, and will be looking to ride this market back towards an objective closer to 1.2000 by late 2015, early 2016.

SPX500 - The only other position on my book at the moment is my US equity short. On Monday I had quite a bit to say about my view here, so I won't go into it again now. The position sits out of the money at the moment, with an average cost of 2073. As of the time of this write-up, the loss on the trade amounts to well under 1% of total equity. I believe we should see follow through to the downside at some point on Tuesday or Wednesday, and if we don't I will consider an exit for another shot at another time. But if we do start to see a pullback from here, I will be looking for a return of 5-6% on this trade. In my view, it all comes down to Fed policy and with the Fed not having much more room to loosen (short of NIRP), and with the market betting the next move will be higher and not lower, this move towards restrictive policy will only making the equity long play that much less attractive to investors. Fed policy has played too much of a role in this market for far too long and we need to see a return to normal correlations. The Fed also recognizes the risks associated with current policy in that it incentivizes excessive risk taking and can create a bubble. All I keep thinking is if we haven't arrived at that point by now, I don't know when we ever will. But either way you look at it, the market should start to capitulate. Will it? That's another story :).

If you haven't considered these two trades, take a look inside now. Via @joelkruger

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