2. Yen via CurrencyShares Yen Trust (FXY). For roughly 15 years, the “yen carry trade” has been a prominent feature of institutional and hedge fund investing. What is it? Investors borrow the low yielding yen to invest in higher yielding assets or higher appreciating assets. Like most things in life, however, there is a down side to the game; that is, if the yen rises in value for its perceived safer haven qualities, institutions and hedge funds rapidly sell stocks, higher-yielding bonds and higher-yielding currencies to avoid paying back loans in the more expensive yen.
Take a look at the momentum FXY had built during the recent corrective activity, literally pole vaulting in the month of October. The yen tracker actually bumped up against its 50-day shorter-term trendline. If the “risk off” correction has truly run its course – if the Fed-fueled “risk-on” mindset is genuinely back on track -FXY will have to stabilize and/or slide. Additional unwinding of the carry trade would likely usher in another bout of heavy volume selling.
3. Value Investing via SPDR Select Energy Sector (XLE). Admittedly, I am not currently prospecting for “value” in the energy patch. I recently stopped out of 1/2 of client positioning in MLPs and pocketed modest gains. On the other hand, the health of the overall market largely depends on value-oriented mutual funds as well as institutional money managers scooping up price-to-earnings bargains. Since the “traditional” and “fundamental” bargains exist primarily in the energy space – since the energy sector has been hit the hardest since July – a believable stock recovery should see leadership in XLE.
Over the last few days, XLE has shown relative strength in the XLE:S&P 500 price ratio. Bullish investors better hope the XLE:S&P 500 bounce is for real.
