User: TnRevolution: Slope of Hope Posts: A Euro, A Yen, & Gisele (by TnRevolution) - Slope Of Hope with Tim Knight

My cousin is currently attending law school at Ole Miss.  When we get together I always ask her what she is studying.  I never forget to remind her that for graduation I intend to buy her a police scanner, so she can start chasing ambulances.  She looks at me with a smirk, but I do believe she is intent on becoming the first female governor of the great state of Tennessee.   With that said, the study of law certainly has it’s similarities to trading.  We always seem to be on the lookout for precedent.

This weekend I’m looking at a chart of the Euro/Yen.  Below is a chart of the Euro/Yen from 2000-2008. My intent this weekend is to take a look at how this trend ended, compare it to the current state of SPX, as well as take a look at current sentiment.

During the years of 2006-2007, the fundamental bearish case was well known, although the market continued higher.  Euro/Yen was no exception.  The internet was ablaze with analysis of the housing bubble, its impending collapse, and the collapse of the US dollar, which was surely at our doorstep.

The Euro stood as the great bastion of strength and stability, decoupled from the great woes of the United States.  In November of 2007, Gisele Bundchen took her famous stand, demanding that she only be paid in Euros.

"Contracts starting now are more attractive in euros because we don't know what will happen to the dollar," Patricia Bundchen, the model's twin sister and manager in Brazil, said in a telephone interview in September from Sao Paulo.

However, early in 2008, the Euro/Yen cross began to show signs of weakening.  It appeared a head and shoulders top was possibly developing, and I can just imagine the Elliott Wavers were salivating at what appeared to be a 5 wave move down from autumn 2007 to spring 2008.  Would the Euro finally give up the ghost?

From spring 2008 through the summer of 2008 the Euro/Yen went on to make a new high, forming a rising wedge, and crushing the dreams of Euro/Yen bears around the world.  It appeared the Euro was destined to only go higher, nearly doubling from its 2000 lows.   But then, the wedge breaks…

So could a similar scenario unfold with SPX?  Is there a precedent?  Your honor, I reference the case of Euro versus Yen, 2008.

The current wedge that has developed on SPX is certainly reminiscent of the Euro/Yen wedge, and the run to new highs has definitely crushed bearish sentiment.  The below chart is from decisionpoint.com.  Take note that the Rydex asset ratio is currently breaking out to new highs over the past 10 years, which shows an extreme amount of bullishness on the part of investors.

Carl Swenlin of decisionpoint.com states, “Digging deeper into the numbers, … Money Market Assets are near 10-year lows, which indicates that Rydex investors have very little money on the sidelines with which to make an additional commitment to bullish positions. Also, Bear Fund Assets are near 10-year lows, demonstrating that Rydex investor expectations for bearish outcomes is very low. These bullish attitudes are bearish for the market because it appears that there are very few resources left to fuel a continued price advance."