Welcome back the Greenback

Now that summer is officially over, the kidlets are thankfully the teachers' problems, our white clothes have been dutifully folded into the cedar chest (Mom's Fashion Rule: “Never wear white after Labor Day, dear.”), and UCLA miraculously pulled out the first major upset of the college football season last night on national television (take that Trojan scum!), we can now return to our regularly scheduled routines, for better or for worse. I, for one, usually have a difficult time getting out of bed after a long holiday, but today was less brutal since the markets opened up strongly on news that hurricane Gustav left the Gulf oil rigs and refineries alone. At last, a ray of sunshine! Maybe this September won't be the downer like most of them have been in the past, but alas. The bluebird of happiness quickly flew the coop as financials and energy stocks continued their slide sending the market into a tailspin. With little more than one hour before close at the time of this writing, the S&P has fallen more than 2%, down 28 points from it's 1303 high put in right after the open. The volatility index, the VIX, shot up over 8%. Could this relatively large move signal the end of the late summer rally?

I don't know, and honestly, I wouldn't put all my eggs in either Papa bull's or Mama bear's basket until we get some sort of confirmation in the direction of the trend. If history is any indication, the bulls usually get skewered in September, but who knows if history will repeat itself this time. So, if the prognosis for the broader market is unclear is there any other market that is in a discernible trend?

You betcha.

Short foreign currencies; go long the US dollar
All of Wall Street has been hailing the return of the US dollar for the past several weeks, yours truly included. On August 14th, we looked at shorting the British pound via the currency ETF, the FXB. At that time, the pound had already fallen precipitously, roughly 7% from recent highs. Since then, it's fallen another 4.6%, with half of that drop happening today. (If, instead, you had gone long the US Dollar ETF, the UUP, you would have been up only 2%.)

All of the other foreign currency ETFs have declined since the rise of the dollar starting July 15th. Another significant decline in the price of oil today probably accounts for the breakout in the US Dollar and the breakdown in foreign currencies. All of them with one exception were down today, with the Australian dollar and the British pound leading the losers (-2.8% and -2.5% respectively.) The exception is the Japanese Yen which posted a very modest gain. Does this mean you should buy it? No. A look at the chart of its currency ETF, the FXY, shows that today's action is forming a higher low within an established down-trend--exactly the time one wants to go short.

Are there other ways to play this market?
As I said previously, you can short any of the foreign currency ETFs or go long the UUP. Just so you're not relying on the chart of the currency ETF alone, check out my August 18th blog for tips on the country ETF action. (A list of both country and currency ETFs are given there.) While you're checking those out, compare them with their short and ultra-short counterparts. Here's a few of them with their short ETF listed first followed by their Ultra-short:

Emerging Markets: EUM, EEV
EAFE Markets (Europe, Australia, Far East): EFZ, EFU
China: FXP (Ultrashort)
Japan: EWV (Ultrashort)

If you check out the above charts, you'll see a long run-up in the prices. Does that mean you shouldn't buy them? No, both the DUG (Ultrashort Oil & Gas), the GLD (a gold ETF), and the UUP made significant moves today, all indicating further upside to the dollar. That doesn't mean, however, that you should charge right in all at once. The best plan of attack is buy on pull-backs if going long the short ETFs, and sell into rallies if going short the long ETFs as in the case of the Japanese yen today. Soon would be a good time to buy the UUP.

Summary
This blog just touched on some of the ways to play a rising dollar. Since the greenback is sensitive to commodities, you can also go long the airlines--a good play if oil continues to drop. (All of the airlines did well today. JetBlue (JBLU), US Airways (LCC), and United (UAUA) are the best of the birds.) Aggressive investors can buy options on the currency ETFs (but note many are thinly traded) or play the currency market outright. Risk adverse investors should probably avoid options and the ultrashort ETFs. Perhaps for now, putting your money under your mattress isn't such a bad idea.