What The Smart Money Is Telling Us
Yesterday’s activity across the
world’s financial markets suggests that the smart money is starting to leg out
of its risk-aversion trade (long gold, bonds, oil, and short US
dollar, and stocks), as it is increasing the odds of a successful end to the now
imminent war with Iraq. And although this doesn’t mean that a bull run in the
equity markets is around the corner, it certainly means that real money
investors are becoming less comfortable with their short positions — including
equities..
Two factors suggest that the real money investors were behind
Thursday’s move: the broad nature of the activity — across all financial
instruments, and the severe move in the price action. Every major financial
market participated in yesterday’s move. From one time zone to the next,
the risk-free bonds and precious metals that investors have been buying up — for
capital preservation — were sold off; oil was punished; and global equities
soared on the heaviest volume in months– the Dow Jones Euro STOXX finished up
6.77%, while US equities posted their biggest gains for the year, as the Dow
finished up 3.57% and the Nasdaq finished up a hefty 4.81%.
Most importantly, however, is that the US dollar
had its biggest one-day gain in seven months against the euro and the world’s
other major currencies. Because $1trillion a day currency markets are the most
liquid in the world, moves of yesterday’s magnitude are only possible if real
money investors participate in the action.
Real money investors, also known as “smart
money,” are the multibillion dollar funds and financial institutions that are
usually one step ahead of the average investor, as a result of better access to
information and a more methodical approach to money management.
These particular investors, who were the first
ones into the risk-aversion trade (long gold, bonds, oil, and short US dollar,
and stocks-short US dollars), are now starting to take profits. And this can be
interpreted to mean that the people who are in the know are becoming less
comfortable betting on a worst-case scenario occurring in Iraq.
