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10 Contrarian Ideas for the Summer

An example of the effect of the accumulated daily tracking errors is shown in the chart below. If each fund perfectly reproduced the index and the inverse of the index, investing equal amounts in each fund would produce a result differing from zero only by the net of dividends minus operational expenses of the two funds. The graph below, courtesy of Yahoo! Finance, shows that the result after one year would be substantially below break-even. (Note: The vertical percentage scales are logarithmic.)

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8. Buy The Dollar

This is a trade for the brave, the foolish or the nimble (or all three). David Spurr argues that with a 50% retracement down from the December to February high (see chart below) on low volume, the dollar may be poised for a rebound. Spurr proposes buying the dollar on that basis. However, others do not agree, feeling that a different technical view of the chart brings the opposite opinion.

The critical nature of the present technical position of the dollar charts is seen in the chart below (from Richard Russell), shown this week by Barry Ritholtz in The Big Picture. The head-and-shoulders top formation for the U.S. dollar, with current prices at the neckline, coming off the right-hand shoulder, makes this crunch time for technicians.

Richard Russell, Dow Theory Letters

In my opinion, the bears have a good case, and I am standing aside for the moment. The risk/return ratios are not very attractive. The potential gain looks like $6 (from $82 back up to $88), while the possibility of dropping back down to the lows around $72 would result in a loss of $10.

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