Tracking the 'Risk On, Risk Off' Trade


Major indices have come off their early morning lows despite the strong dollar, which has not hurt commodities — or commodities stocks.

This has happened more often in the last month — not all the time, but enough to get notice.

Stronger U.S. economy, stronger dollar, stronger stock market? It could happen more regularly.

Tracking the "risk on, risk off" trade.

I get a lot of questions on what, if any, leading indicators there are that have predictive powers regarding the "risk on, risk off" trade.

I haven't found one, but I have been looking at an interesting ETF recently that is certainly tied to the trade. Check out the PowerShares DB G10 Currency Fund. I spent some time Tuesday with Martin Kremenstein, chief investment officer of db-X, Deutsche Bank's exchange-traded product platform.

This ETF is a basket of ten global currencies: U.S. Dollars, Euros, Japanese Yen, Canadian Dollars, Swiss Francs, British Pounds, Australian Dollars, New Zealand Dollars, Norwegian Krone and Swedish Krona. They go LONG the three currencies with the highest interest rates, and SHORT the three with the lowest interest rates. It's rebalanced on a quarterly basis.

Currently, they are LONG the Aussie dollar, the New Zealand kiwi, the Norwegian kroner, and SHORT the U.S. dollar, Japanese yen, and Swiss franc.

In other words, it's a proxy for global growth. Most interestingly, the DBV began diverging from the S&P a month ago, another sign that the U.S. was partially decoupling from the rest of the world.

I know, a lot of you believe that it is not possible to decouple, that everything is connected, that everything moves together.

Of course everything is connected, but it doesn't mean there can't be significant outperformance. And the global markets are saying this loud and clear: the U.S. stock market has begun pulling away from Europe.

It's happened again this week, not a great week for stocks, but the S&P is down 0.6 percent, Germany is down 2.4 percent, Spain down 4.5 percent.

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