A look at a trade with a 5-year track record of 100% success, although that doesn't necessarily guarantee future success. But there is more than one way to play this trade.
The trade I'm going to tell you about today boasts a 5-year track record of 100% success. Of course, that doesn't guarantee future success. Something could go wrong. But odds are it will go very right. And there's more than one way you can play it.
Here's the trade: Go long the US dollar.
You probably think the US dollar is in big trouble. Longer term, I'd agree with you. But May is a very special month for the US dollar. That's because in every May over the past 5 years, the US dollar has gained. The average gain is 3.7%, as you'll see from this chart:
That's a pretty good track record of success. Sure, the gains aren't huge. (So far this month, it's up about 0.67%.) But there are ways to leverage that.
But more importantly, I think the dollar has a shot at rallying well past the month of May. I'm cautiously bullish on the greenback because the US economy is showing signs of life. Manufacturing is expanding. Capacity utilization is rising. Weekly hours worked is going up. This kind of news makes the Fed more likely to "taper" its flow of easy money. And that is generally good for dollar strength.
Lastly, from a technical standpoint, the dollar is near the bottom of the trading range that has "trapped" it for more than 2 years.
So if the dollar's technical support at the bottom of its trading range holds, traders might start buying the dollar more aggressively to position for the dollar moving higher and potentially breaking out of its 2-year range.
Let me give you 2 ways to play this potential dollar rally … and one to avoid.
Long the dollar
The most obvious and direct way to play a rising US dollar is to bet on the greenback. That's most easily done through the PowerShares DB US Dollar Index Bullish ETF (NYSE: UUP).
This ETF tracks an index composed of 6 major world currencies: euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc. As the US dollar gains strength against these currencies, PowerShares DB US Dollar goes up.
Double-short the euro
If the US dollar goes up, the euro usually goes down. And the ProShares UltraShort Euro ETF (NYSE: EUO) gives you a leveraged play on that move. It targets twice the inverse of the daily movement of the euro.
Mind you, leveraged funds aren't for everyone. They're for speculators only.
There's one play I would avoid altogether: a triple-leveraged long dollar fund called the PowerShares DB 3X Long US Dollar Index Futures Exchange Traded Notes (NYSE: UUPT). Triple-leverage sounds good, right? That would turn the dollar's average 3.7% move into a potential 11.1% move. Not bad for a month!
Here's the thing: The PowerShares DB 3X has abysmal trading volume—an average 2,705 shares a day. So that means you're likely to get hurt badly on the spread going in and getting out. And that could chew up any gains in a hurry.
Finally, remember this: Just because the US dollar has a track record of going up in May doesn't mean it has to happen again this May. But it's also true that the odds favor this trade this year, for the simple fact that the Fed may finally stop suppressing interest rates.
Sean Broderick is a resource strategist with The Oxford Club. To read more articles by Sean, visit here.
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