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Dollar At Extreme Low Sentiment - Euro Euphoria




At the start of the summer the fiscal woes in Europe had hammered the Euro currency and caused the public sentiment for it to fall into an abyss. There was hardly a day without harsh news out of Ireland, Spain, Greece or some other European country which many thought threatened the very future of the common currency.

By one sentiment measure, public opinion had become so lopsided that according to contrarian analysis, we were due for an important inflection point. The Daily Sentiment Index for the Euro plumbed 2% - implying that 98% of the general public or retail traders were bearish on its performance going forward.

Euro index DSI extreme Sep 2010

In contrast, the US Dollar enjoyed the other extreme state with a DSI reading of 98% - implying that hardly anyone could imagine the dollar going down. That, of course, is exactly what it did in the ensuing months. Woe to any trader that had suggested that the favourite currency haven would actually end up being a trap and that the Euro would be just fine.

US Dollar index chart DSI extreme Sep 2010

That quick recap brings us to today where we are now observing the exact opposite situation between these dueling currencies. Currently, the DSI for the US Dollar is down to 5% (as of September 22nd 2010). And the Euro is suddenly the belle of the ball with a 96% DSI bullish reading. So once again we have the retail crowd herding into opposite corners when it comes to these two currencies and creating yet another opportunity.

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6 Responses to “Dollar At Extreme Low Sentiment - Euro Euphoria”  

  1. 1 IceColdBear

    Thanks for all the great posts! This one is very telling.

  2. 2 Charles Alkan

    Thanks for presenting this. I'd be curious about the DSI for the Euro throughout the month of May. If it was similarly low at the beginning of the month, one would have to be careful about putting the contrarian trade on without confirmation. Any data on this? Thanks.

  3. 3 PEJ

    Thanks a lot babak. Fantastic charts. It's time to start closing the long EUR positions...

  4. 4 zweig

    Good chart, but I would hesitate to stand in front of the Fed QE train just now.

    Going by the peak-trough based on the chart, timing-wise a better time would be to wait until after the Nov mid-term elections, 6 months seem to be the period of this ding-dong between Euro and dollar. Besides, we haven't had the typical supermodels' "dump-the-dollar" comments as contrarian indicator; so my guess is the bottom would be somewhere in November to short euro.

  5. 5 Daniel

    The thing about currencies is that they’re mainly about what’s happening currently, and in that sense they are pure sentiment. There is no new product surprise one can wake up to. There is never a sudden takeover announcement. It is mainly complex perceptions, which fluctuate.

    So I would bet there are ‘subatomic levels’ to these interesting, extreme sentiment numbers-- and that if one "drilled down" further, as pundit Carl Swenlin likes to say, one would find a qualitative difference btw the 95% plus readings of the two situations.

    At the time of the worst badmouthing of the Euro, it was “obvious” to All Thinking People that it was toast and that the Eurozone Union was toast. No, the main subject of talk was how anyone could've been stupid enuf in the first place, to think of something so clearly dumb, etc. etc. What DO these Europeans have in common after all, the very idea, gad.

    I believe this is what the Zweig comment above is pointing at.

    Now, today, the dollar bearishness has a more tepid and ‘technical’ and strategic quality to it. Many negative comments I've heard recently about the dollar have been conditioned by, "of course, the innate wonderfulness of the US economy will ultimately do this or that". The flat out disdain toward the Euro that went down last May is NOT here--even if the numbers are quite similar.

    This is anecdotal of course, but then so is the Investor's Intelligence perception of who among newsletter writers is bullish and bearish. Sentiment is slippery.

    Kudos to Zweig above, I believe his/her contrarian tendrils were picking up something "substantive"; if one can even use such a term in this nebulous realm of weighing and measuring expectations.

    Daniel

  6. 6 Bill Goode

    Notice that these two currencies mirror each other. What's missing in this analysis is the price of gold and / or silver. Both of these currencies are due for a crash. They are simply racing each other to the bottom. Measure the value of either currency against gold or silver and you find them both headed down.

    The US is so debt bound that the only way it sees to get out of debt is to print more money. Interest payments are so overbearing that they cannot be met without borrowing more money to pay the interest. So what does the US government do? Go deeper into debt of course, owing more interest.

    Europe has adopted a socialistic view (starting with the French Revolution) that the government owes the people a living. People have been told they could retire at age 55 or 60. They bought into this Ponzi scheme with their taxes and expect to see it through. As their expectations become threatened, they complain and riot. But all the complaints and riots will not bring in the money to give them their expected retirement. People are living longer and smart people move out of this Ponzi scheme.

    Both currencies are due to crash. The Euro will break apart into its previous currencies. The multi-cultural nature of Europe just doesn't support the concept of a unified currency. In the USA the dollar will crash when people no longer trust its value. The Chinese, the major holders of US debt, are teetering on that point. They know better than to keep buying up the dollar as it falls.

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