Locking in 56.25% Gains on Your Bet against the Euro… and “Sweetening” up Your Portfolio, Again

Nicholas Vardy

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

Two of your positions in your Global Bull Market Alert portfolio, however, have weathered the recent pullback quite well. Both your bets against the euro, through the UltraShort Euro ProShares (EUO) and on sugar, through the iPath DJ AIG Sugar TR Sub-Idx ETN (SGG), have been profitable trades during the past few weeks even when global stock markets tumbled.

And with your May $20 EUO call options now up 56.25%, sell half your position here to lock in some well-deserved profits. Tighten your stop on EUO to $19.20.

You were stopped out of Russian cell-phone play Vimpel-Communications (VIP) and National Bank of Greece (NBG) for losses. You were also stopped out of iPath DJ AIG Sugar TR Sub-Idx ETN (SGG), locking in a gain of 7.65%. As always, sell any related options that you bought as soon as possible when we stop out of a recommended position.

Overall, your Global Bull Market Alert portfolio hasn’t been “cleaned out” this quickly since the sharp sell-off in the markets in the summer of 2008. With investors selling markets indiscriminately, every global market has headed down since reaching 15-month highs on Jan. 19.

With the MSCI emerging markets index on the verge of breaking down through its 200-day moving average for the first time since late April   — a seriously bearish sign — it is tempting to recommend a short position in emerging markets. Yet, I am still reluctant to make an outright bet against global markets just yet. Technically, global markets are extremely oversold. And although this sell-off has been sharper than I had expected, I continue to expect to see a relatively sustained bounce, at least over the short term. Friday’s mid-day bounce in the markets and stronger trading in Europe are both positive signs.

You are already well-positioned to profit from any coming bounce through a position in your portfolio, Mechel (MTL). I expect MTL to soar on any (long overdue) improvement in market sentiment. But rather than increase your exposure to the stock market during this period of uncertainty, rather uncharacteristically, I am recommending that you re-enter a position that you have just exited — the iPath DJ AIG Sugar TR Sub-Idx ETN (SGG).

As you may know, I am not in the habit of “catching falling knives.” But I am making an exception for the extraordinary (and, in my view, completely unwarranted) sell-off in sugar last week.

The fundamentals behind sugar’s rise remain positive. The demand for sugar from both developed and emerging economies is growing unabated. The global supply shortage will persist for the rest of 2010. Goldman Sachs has just upped its target price for sugar by 7 cents. Conclusion? Sugar is simply being caught in the broad-based liquidation of commodities — the same “baby out with the bathwater” effect that has hit your other stock holdings. I expect raw sugar prices to rebound strongly from their recent six-week low.

So, buy back the iPath DJ AIG Sugar TR Sub-Idx ETN (SGG) at market today, and place your initial stop at $69.00. And with SGG closing at a price of $74.67 on Friday, you should be able to re-enter this position at a better price than the $78.80 you exited the position last week.

Portfolio Update

UltraShort Euro ProShares (EUO) jumped yet another 3.9% this past week as pressure on the euro continued. With this leveraged bet against the euro penetrating its 200-day moving average on the upside, EUO remains a BUY. Sell half of your May $20 call options, for a 56.25% gain, and tighten your stop to $19.20.

Mechel (MTL) came perilously close to hitting its stop before rallying strongly on Friday’s close. As MTL regularly soars 7-8% in a single day’s trading, I’m keeping MTL at a speculative BUY. But make sure you stick to your (tight) stop of $18.50.

P.S. If you want to keep up with my latest insights on developments in fast-paced global markets, you can now follow me on Twitter on @NickVardy.

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We stopped out of iPath DJ AIG Sugar TR Sub-Idx ETN (SGG) this week for a gain of 7.65%. We also stopped out of Vimpel-Communications (VIP) for a loss. As always, sell any related options that you bought as soon as possible when we stop out of a recommended position.


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