My New Dollar Basket

This is an update of my previous dollar basket post. The UUP is, of course, the Powershares double US dollar (bullish) and this time around the focus is on other currencies and short term bonds (SHY) as the wild card.

The PDQ Dashboard has gone through quite a few refinements since the initial post and this basket should be considered an alternate to those earlier PDQ components.

The relative beta of the CYB (yuan) is obviously out of sync with the rest of the basket so this signal bears a closer look.

Also out of sync is the relative SHY (short term bonds) beta.

Both CYB and SHY display consistently high linearity and an identical 19% P&L over the past 6 months, and both have a similar trade frequency. And, as in the case of the FXY basket weaving post, in both cases an examination of the actual returns for each side of the pair trade reveals that UUP is the side to trade (the CYB and SHY trades only generate 1% and 2% of the 19% return respectively. For the above reasons I regard these beta skewed pair partners as valuable forecasters of UUP momentum.

The UUP fired a number of long signals on Monday's close and I'll be keep a close watch for exit signals. Since virtually all the PDQ components have 5-7 N day values (Z-score band cycle side to side) I would expect reversals sometime in the next 3-4 days.

Here's a peek at the current UUP call option string. Virtually all open interest is at the ATM 23 calls and despite $.15 net gain in UUP the 23s fell a nickel. A lot of interest here and the early action today was focused on buying the Ask.