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Bad combo: Speculators fear 'double-top' in key markets

November 12, 2009 |  4:02 pm

Has the "carry trade" become too tired to carry on in the short term?

Thursday’s session in global markets saw a reversal of the recent rush into gold, emerging markets and stocks in general, and a rebound in the beaten-down dollar.

That spurred talk that the army of hedge funds and other speculators engaging in the carry trade -- the popular (maybe too popular) strategy of borrowing in dollars at rock-bottom interest rates to invest in risky assets worldwide -- might be getting anxious to lock in gains after markets’ powerful run since July.

"It’s prime time to take some profits," said Michael Woolfolk, currency strategist at Bank of New York Mellon.

Bactriancamel The percentage changes in markets Thursday weren’t huge -- the Standard & Poor’s 500 index lost 1%, to 1,087.24, while the DXY index of the dollar’s value against six other major currencies rose 0.7% -- but some traders were pointing nervously to a potential "double-top" pattern on their charts. (Think: Bactrian camel.)

The S&P 500, for example, pulled back Thursday after briefly surpassing the 1,100 level. The index also had failed to hold above that level after topping it intraday on Oct. 21. That prior failure gave way to a sell-off that took the S&P down as low as 1,030 by Nov. 2, a drop of more than 6% from the Oct. 21 high.

The same potential double-top pattern may be playing out with the euro, which in recent days has made another attempt to push decisively through the $1.50 level, without success. The European currency ended Thursday at $1.485.

The euro also peaked out around $1.50 on Oct. 26, then fell to near $1.46 by Nov. 3, before making another run for $1.50 this week.

In the case of the euro and other favored targets of the carry-traders, "You couldn’t take out the [October] highs today, so some traders are throwing in the towel," fearing a serious loss of momentum, said Brian Dolan, currency strategist at Gain Capital Group in Bedminster, N.J.

Some traders also may be wary of betting further against the dollar in the near term with the U.S. again jawboning for a "strong" greenback and amid reports that Thailand, Russia and other countries have been buying dollars to try to slow their own currencies’ advances against the buck.

The point is, if the carry trade is about to see a respite, the dollar could get a bounce -- and all of the things bought with borrowed dollars could shift into reverse for a while.

-- Tom Petruno