Has The Euro/SPOO Correlation Broken Down, Or Is Long EURUSD The ABX Trade Of 2012?

Tyler Durden's picture

In his latest note, Jefferies' David Zervos observes something that has been troubling us for the past few weeks as well: namely, whether the relentless plunge in the EURUSD, now down nearly 600 pips from when we said the next EURUSD target could be 1.20, coupled with a far tamer drop in various US equity risk indicators, such as the S&P, means that the EURUSD/SPOO correlation, so well known to most traders, has finally broken down. We doubt it.

What we suggest is that this express elevator to EUR hell, is merely an overreaction on the part of overzealous ultra short-term specs who have been burned so many times shorting equities following central bank intervention, that the only venue left to express bearishness is in the FX realm now that everyone is doing it. Indeed, the most recent CFTC number showing an absolute record of non-commercial EUR spec shorts confirms that it is not a long-term trend, but rather short-term speculators that has pushed the EUR disproportionately lower than where it should be relative to broader risk metrics. Because while equity markets are now obviously pricing in more easing on the part of either the Fed or the ECB, FX continues shorting the only one-way trade that, like a broken ATM machine, prints money day after day. Needless to say, the pain trade will be any appeasing announcement from Europe. At that point we are quite convinced that courtesy of the record number of EUR shorts, which will scramble like manic clown to scramble out of a burning circus all at the same time, any gap in the EURUSD/SPOO arb will be closed momentarily, with a huge overshoot to the upside on any even remotely credible EUR positive news.

Here is what Zervos thinks:

A new Euro/Spoo correlation coming?


One of the many bright trade ideas to start the year was long spoos/short EURUSD. The idea was quite compelling in that the only thing that could truly derail a Bernanke induced spoo rally would be big trouble across the pond - and hence big trouble for the EURO.


And to be sure, the EURO did rally in the beginning of 2012 (from 1.30 to 1.34) as the LTROs took European woes out of the limelight. Of course spoos ripped higher at the same time, and the EURO "hedge" only cost a few percentage points of the double digit risk on rally.


Then, as the European stress began to re-emerge towards the late spring, both the Euro and spoo took a dive. If you shorted 100m EURUSD at the beginning of 2012 and bought 100m spoos, it certainly generated a less volatile, more appealing risk adjusted return trade than just a naked long spoo position. The "hedge" worked nicely in times of stress and didn't cost too much in times of relief. That said, I would still maintain that a long blues position has been a better risk/reward hedge for the spoo. And of course, spoos + blues sounds a lot cooler!


In any case, something smells a little different in the last week or so - the spoo/EURO correlation seems to be breaking down. While spoos have bounced 3 percent off the lows (and are still up almost 6 percent for the year), the EURUSD is on its knees, at the lows of the year (down 4 percent YTD). On the downside, the correlation seems intact. For example, as we watch the market respond to grim news out of the Euroarea this morning - with the Germans admonishing the Spainish on Bankia and proposing gold collateral for Eurobond issuance - the spoo and EURUSD both moved lower. But on the upside in recent sessions, when there is broad discussion of a Eurobond, ESM bond issuance, Euro deposit insurance or ECB backstopping, the spoo heads higher with no meaningful bounce in the EURO.


I would argue that there seems to be a growing recognition amongst longer term investors that the "socialized, federalized and stabilzed" solution to Euro area problems is now being seen "correctly" as EURO negative. But at the same time this solution is fantastic news for global risk assets. Once Europe backstops, federalizes and socializes we can all breath a collective sigh of relief (unless you are a thrifty German saver, in that case you can just start drinking heavily). Importantly, this kneejerk idea that any policies to stabilize Europe will be EURO positive is fading fast - thankfully.

Umm, no. The reason why the "correlation has broken down" for the time being, is that specs have piled in on the EUR short trade, while not daring to get burned when the banks announce something, anything, as can be seen on the chart below, which shows net non-commercial EUR shorts at all time highs, while the E-Mini bearish spec position remaining  very tame by comparison.

Intuitively, when the regime changes, one can bet that the EUR short covering action will be unlike anything seen before. Actually, make that like something seen before: below is a chart showing the nearly 400 pip move in seconds when the expanded QE1 was announced on March 18, 2009.

Add to this a record number of shorts, and being LONG EURUSD (potentially with an offseting SPOO short for a less balance sheet intensive pair trade) which will easily rip 400-500 pips in the current record EUR short environment, could well be the ABX trade of 2012 for some lucky trader.

There is just the minor matter of timing...

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CvlDobd's picture

It's bullish!


Edit: I read it as the record amounts of shorts combined with the chance of central bank intervention could unleash one hell fo a short squeeze up.More of the same for us bears it seems.

101 years and counting's picture

I'll take: How to keep people from shorting the SPX while its collapses, for $1 trillion, Tyler.

malikai's picture

Nah, the more shorts the better. The goal is a lower footing and better public justification for the next big print. Oil should be around $80 or so and the S&P at say 1100, which at this rate should be around the next FOMC meeting. At that point, remaining longs will be in terrible pain(or smart money) and the loads of shorts will be the fire that gets the rip going. Just look at anything from March 09 to 10 or Oct 10 to May 11. This shit is getting old..

The Monkey's picture

The problem with any trade right now is event risk. The Euro may get to 99% bears before a reversal is in the cards.

idea_hamster's picture

Actually, if you're looking for a scenario that sends gold to $2000+, wouldn't a simultaneous downdraft in the value of the dollar and the value of US risk assets be the formula?


The ZH counter-hypothesis here seems to be that both the S&P and the DYX are set for a sharp move lower, a pair of moves that have not shown high correlations in the past.  Rather, the pattern was to move between debt and equity based on the relative values -- but if both fall simultaneously, where's the safety move?

narnia's picture

I see more of a ricochet from massive deflation. Intervention is EUR negative.

LawsofPhysics's picture

"Bumps" in the road on this downhill slope.  Nothing more.  We will continue to "beat expectations" all the way down.

HungrySeagull's picture

This too shall pass.

Just don't have the entire pit gather around chanting "Drop! Drop! Drop!"

Dick Darlington's picture

Once Europe backstops, federalizes and socializes we can all breath a collective sigh of relief

What an utter, utter piffle.

B-rock's picture

...from a TRADER'S perspective, my friend...  

DeadFred's picture

Anyone want to tell us how this federalization comes about? Anyone. The panic isn't anywhere close enough for that. Then the stickiest issue, who will they get to lead this federalized EU? Stick this idea in the to-be-used-later folder. With the mix of record shorts and nasty news this is going to be quite the roller coaster ride.

Conman's picture

Euro should feel more pain tomorrow, isn't Cyprus an inch away from asking for a bailout?

q99x2's picture

If ifs were 5ths we'd all be drunk. A matter of timing.

You'd have to have inside info to get the timing right. Someone will have it and get it right. And, then someone else can catch them and arrest them and so on.

Tirpitz's picture

Arrest them? While the judicial branch is complicit in the crimes committed? Good luck!

Zero Bid's picture

anyone know where I can get a eurusd 0.99 hat? As central planners bankers go, Draghi doesn't have enough facial hair to save the euro.

slewie the pi-rat's picture

this is awesome tyler

i'm gonna get my bong and smoke this and then come back and see what's perkin beside my chart-porn gherkin

edit 14:21 post:  faaaar0wwt,mayaaan...

well timing isn't everything;  it's the only thing at this point;  and the chairsatan & his faustian minions are holding the baton and cuing the oboes and the snares in the traps

just for the zH of it i here's where i went to look at a few more charts: Commodity Futures Charts & Futures Quotes Menu

then, instead of the EUR, i took a peek at the U$Dollar after a quick review of the weekly cots report US Dollar Index Monthly Commodity Futures Price Chart  where the monthly has that dojo werkin like a gherkin!  [and, nice rise since the 73 range last year:  beaucoup%] but let's pull these numbers : 

  • USD vol:  563,763
  • USDopen interest:  50,999

here the EUR 5-yr monthy chart [dojo down]: Euro (Globex) Monthly Commodity Futures Price Chart

  • EUR vol: 6,392,197
  • EUR OI:  344,564

the S&P500 gapped down friday S&P 500 Daily Commodity Futures Price Chart: June 2012  [the mini did not!]

i think we'll see the correction VERY soon and it will be as tyler envisions here, only much less so than in the 2009 nessie4.0;  this ain't '09 any more

why?  b/c daBoyz mentioned above want things screwed down tight;  maybe i'm wrong, either about what they want, here, or abt their control at this point;  we shall see

they do NOT need a QE announcement to do this, imo;  all they gotta do is wag the dog

slewie thinks ther's a pretty good chance TPTB will want to buy some time politically, in the EU too, here;  this also tends to indicate releasing some of the fractile tensions;  so i think it is likely we'll go risk0n and risk0ff again by friday

from what i've read the last few daze, after timmah & christie exited stage spain, the EU has 2-400 B EUR for the sov's and anything the swissies or the FED can help with for the commercial ponzi artists in "swap-lines"

the chairsatan has the T market just where he wants it;  he couldn't have written a better script for the funding needs of the Treasury in a world of BK zombies

that boo weren't bad, but this just ain't theBigRad 

[people make gazillio,000ns$$$ fading slewie!]

Jack Sheet's picture


is a fictional food product that served as a running joke within the Babylon 5 science fiction television series. In the series' fictional universe, spoo is made from worm-like creatures of the same name and is generally regarded as the most delicious food in the galaxy


gwar5's picture

It's OOPS, backwards.

5880's picture

It's "SPU"

S&P futures is "SP", then "H" is March, "M" June "U" is Sep and "Z" is Dec. But calling them "SPU" just stuck


CommunityStandard's picture

I much prefer the articles like this.  Great analysis.

CvlDobd's picture

I agree. The dual personality "Technical Analysis doesn't work so here are some charts" Tyler is my favorite.


Charts are dead, long live charts!

Pretorian's picture

Markets are efficiant! LOL

icm63's picture

What is SPOO ??

Seorse Gorog from that Quantum Entanglement Fund. alright_.-'s picture

It's either some nasty slimey sauce or it's an S&P 500 contract. I'm not sure which is being referred to.

Seorse Gorog from that Quantum Entanglement Fund. alright_.-'s picture

Think of all those stoplosses. I'll be hunting this beast. Call me Ishmael.

jekyll island's picture

I hope your trade ends better than Ishmaels voyage: 

Buoyed up by that coffin, for almost one whole day and night, I floated on a soft and dirgelike main. The unharming sharks, they glided by as if with padlocks on their mouths; the savage sea-hawks sailed with sheathed beaks. On the second day, a sail drew near, nearer, and picked me up at last. It was the devious-cruising Rachel, that in her retracing search after her missing children, only found another orphan. FINIS


jekyll island's picture

Where's NewWorld Orange with the Forex trade specifics for this recommendation? 

mtthw2's picture

Spoo's is an old trading term, meaning the front contract of the SPX.  I haven't heard that word for awhile--since I was floor trading the OEX at the CBOE using the Scharzatron to determine option values. LOL  Brings back memories.

5880's picture

Acronym, plz

Unless you're Matt who stood down by Schwab

snowlywhite's picture

There is just the minor matter of timing...


could say so; I'm hunting this whale for a while now and so far, it's abit ellusive...

Satan's picture

I'm enjoying the volatility. Although I feel a little dirty to admit this .

crawl's picture

It's only a matter of when the FED and other CB intervene openly with the markets.  Back in '09, it seemed everyday in February and March, until the FED made the announcement, was a cliff dive.  While the ES has been selling off, it's not quite as intense as the February to March '09 selling action.  Nonetheless, so many short positions can only equal one thing when the market makes a sudden, deep turn like a CB intervention. 

This is a rigged market. Just remember the FED has no limit to the upside, but can only tolerate so much of a selloff or bear market action.  Good luck trying to get a fill when the news sends the EUR soaring.  European Union is failing, US is slowing, Asia's economy is slowing too.  The CBs should be making an announcement not too far into the future, maybe sooner than the Greek election day if the EU thing really dives hard. 

Enjoy playing the short side for a while.  It seems to have been so long ago that being short was so easy.  The easy play won't last for much longer.  Keep those stops in place, just in case.

mtthw2's picture

5880-- What does Schawb have to do with the Schartzatron?  The Schartzatron used the Black–Scholes model for option valuation/pricing .  Steve Schartz out of Chicago made this machine/monitor in the late 70's.  It was a neutral- spreader traders dream.  Made my first fortune  trading the OEX using this machine for valuations of neutral hedging.  Never used Schwab, a retail brokerage firm.  Hope this clears up the differences of the two entities.

maxw3st's picture

CFTC non-comm shorts have been steadily decreasing since reaching a peak June 5. Current differential between large traders (net short) vs commercial traders (net long) was -227K contracts as of last Tues. 9/04. At its peak this differential was -473K contracts. That's a decrease of 52% in the short position of large traders. Commercials have been unwinding their longs as LT's have unwound their shorts. Last week, commercials increased their shorts by 10K contracts more than they decreased their longs. The decrease in LT shorts/decrease in Comm. longs figures remained in balance.

Keeping in mind that we haven't seen CFTC data since 9/4, and given the extreme bullish action in the EURUSD since, it's pretty safe to say that over the last week and a half; LT's have substantially decreased their shorts even further. In short, not sure what "record short" is being discussed above, but it's not in the EURUSD. Small specs are extremely bearish, but their total position is not statistically significant when compared to Comm's and Large traders.

Safe bet that at this point Large traders are close to flat on their short position. They have not added to their longs throughout the short unwinding process. Next Friday will reveal what has been going on since Tuesday this week. We'll get less than a third of the picture with today's release of COT data which covers the Tues to Tues from 9/4 to 9/11.

absente reo's picture

This piece was submitted in June:


Submitted by Tyler Durden on 06/03/2012 13:41 -0400