“Reloading the Guns” against the Euro

After hitting record highs only two weeks ago, the Global X/InterBolsa FTSE Colombia 20 ETF (GXG), the Market Vectors Indonesia ETF (IDX), iShares MSCI Thailand Investable Market Index Fund (THD) and Itaú Unibanco Holding S.A. (ITUB) all pulled back. The good news is that they fell much less than the markets in general and the iShares MSCI Chile Investable Mkt Idx (ECH) actually ended the week higher. That said, I am moving some of your positions to short-term “holds” until the markets’ current swoon settles.

Your bet against China through your short position in the iShares FTSE/Xinhua China 25 Index (FXI) benefited from the pullback, rising 4.53%.

This week’s Global Bull Market Alert position adds to your bearish bets on global markets by — as The Wall Street Journal put it — “reloading the guns” through the UltraShort Euro ProShares (EUO). This is a bet that we have profited from before. It seeks to replicate twice the inverse performance of the EUR/USD daily price change. Put another way, when the euro goes down against the U.S. dollar, this fund will go up by twice as much.

For much of this year, the hot trade on Wall Street was wagering against the euro. But as Greece and other nations pursued economic austerity measures and the prospects of the eurozone appeared to improve, the euro staged a blistering two-month rally from $1.19 to $1.33.

This prompted traders, including us, to trim our bets against the euro. Recall that you stopped out of your position in UltraShort Euro ProShares (EUO) with a 14.99% gain.

That all changed last week, as a rush of funds began putting on bearish euro positions. After hitting a key point of technical resistance, the euro dropped 4% against the U.S. dollar, its biggest drop since the week ending May 7. In fact, Wednesday saw the largest single-day decline in percentage terms for the euro against the dollar since October 24, 2008.

Virtually overnight, the market decided it had become too optimistic about European economies relative to the United States. The Federal Reserve’s decision to buy Treasuries also fanned worries about the fate of the global economy and pushed traders to take risk off of the table.

A bet against the euro is also a way to hedge your current bullish stock positions. The euro tends to weaken and the dollar tends to strengthen when global stocks tumble. In that way, EUO is a good complement to your short position in iShares FTSE/Xinhua China 25 Index (FXI).

So buy the UltraShort Euro ProShares (EUO) at market today, and place your stop at $20.75. If you want to play the options, I recommend the November $23.00 calls (EUO101120C00023000).

Portfolio Update

iShares MSCI Chile Investable Mkt Idx (ECH) hit a record high of $66.02 last Tuesday, ending the week 0.5% higher. The government raised interest rates by 50 basis points for the third consecutive month, pushing the Chilean peso higher against the U.S. dollar. ECH is a BUY.

iShares FTSE/Xinhua China 25 Index (FXI) dropped 4.53%. It is bullish news for this short position. With negative sentiment dominating global markets once again, this bet against China is back to a SELL SHORT.

Global X/InterBolsa FTSE Colombia 20 ETF (GXG) dropped 2.49% last week. With the economy expanding by an estimated 5.1% in Q2, as one of the strongest markets in the world this year, GXG is temporarily a HOLD.

Market Vectors Indonesia ETF (IDX) dropped 3% this past week. With the country’s economy growing at an annual rate of 6.2% in Q2 of this year, Asia’s strongest-performing market for 2010 remains a BUY.

Itaú Unibanco Holding S.A. (ITUB) dropped 2% this past week. Brazilian banks weren’t exposed to the contagion during the financial crisis because they had less leverage. ITUB is a temporary HOLD.

iShares MSCI Thailand Investable Market Index Fund (THD) dropped 1.78% last week. As the second-best performer in Asia behind Indonesia this year, THD remains a BUY.

P.S. If you want to keep up with my latest insights on developments in fast-paced global markets, you can now follow me on Twitter on @NickVardy or on my new blog, NickVardy.com.