How to Thrive in a World of Falling Knives

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

As a result of these sharp market movements — despite very wide stops designed to keep you in the market — you were stopped out of both the Ultra S&P500 ProShares (SSO) and the iShares MSCI Emerging Markets Index (EEM) at a loss.  

The lesson? Currencies are the only safe game in the global investment universe. Every single one of your currency positions is now up by double-digit percentages, even as the Direxion Funds, Dollar Bull 2.5x Fund (DXDBX) hit record highs this past week. Both the Market Vectors Double Short Euro ETN (DRR) and the CurrencyShares Japanese Yen Trust (FXY) also ended the week up.  

Your short position in the iShares MSCI United Kingdom Index (EWU) also ended the week up a solid 5.7%, even after markets rallied strongly at the close of Friday’s trading.

It’s an old traders’ rule of thumb that when markets get too volatile, as they are now, the best thing to do is to take a step away from the market. By emphasizing currency bets that are uncorrelated to the overall stock market, that’s exactly what you’ve done. Stock market positions such as your short position in the iShares MSCI United Kingdom Index (EWU) are extremely challenging in market conditions such as this one. As result, they should only make up a small portion of your portfolio.

Here is the dilemma: there are only so many ways you can play global currencies. And you already have substantial (successful) positions betting on the rise of the U.S. dollar.

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At the same time, rather than recommend any sub-optimal trades, I would encourage you to do what successful traders do as a matter of course — to add to your existing successful positions. The Direxion Funds, Dollar Bull 2.5x Fund (DXDBX) is the steadiest and most diversified of your currency bets. The CurrencyShares Japanese Yen Trust (FXY) is the least volatile bet, but offers the least upside. Yet as the chart below shows, either bet is a massive out-performer compared with the overall U.S. market.

Portfolio Update

The Market Vectors Double Short Euro ETN (DRR) nudged up about 1.8% this week. Feel free to add your positions on any pull-back. DRR is a BUY.

The Direxion Funds, Dollar Bull 2.5x Fund (DXDBX) hit a record high of $46.06 last Thursday, before correcting slightly on Friday. It ended the week up 1.97%. It remains a BUY.

Your short position in the iShares MSCI United Kingdom Index (EWU) ended the week up 5.7%, despite the market’s strong rally at the close on Monday. It remains SELL SHORT.

Your short position in the CurrencyShares British Pound Sterling Trust (FXB) was broadly flat. Although the British currency may experience an occasional counter-trend rally, the medium-term trend is strongly down. SELL SHORT.

The CurrencyShares Japanese Yen Trust (FXY) broke through the $106 level briefly on Thursday before settling back at $104.09 for the week, ending up 1.44% for the week. I expect the appreciation of the yen to continue as the carry trade continues to unwind. FXY is a BUY.

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Your Global Stock Investor portfolio was largely flat this week, as your currency bets stayed within a trading range. Meanwhile, most of Europe officially fell into recession last quarter.

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