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A Contrarian Investment You Won't Like

I don't know.
It's not very often (if ever) you see a financial publication that begins with "I don't know." The fact of the matter is, my head is spinning.
It's Sunday evening and I've just finished Day 2 of our Survival Summit. It would not be an exaggeration to say it's been an incredible event.
I'm an overlicensed, practicing investment banker. The market is my daily life. However, this event has provided a refresher on a number of critical things I've been neglecting. More importantly, it has delivered new tools that I'll be able to use in my investment portfolio immediately.
If you couldn't make it, I'm sorry. You've missed out.
However, all is not lost. Audio and video recordings of the event will be available, and, without even seeing the quality of the editing, or the skill of the film crew, I can recommend them without reservation. The content that was delivered has overwhelmed me. You can preorder your copy here.
This doesn't take away from the fact that I still don't know.
Most of us agreed that the U.S. is in serious trouble. There was a divergence of opinion on whether we'd experience inflation, deflation or hyperinflation, with many believing there would be a combination.
This isn't what has me perplexed. One excellent point made by several of our presenters was that diversification, as defined by the major brokerage firms in the U.S., is more myth (and commission generating) than reality.
What you need to realize is that even if your entire investment portfolio is diversified across bonds, stocks, options, real estate trusts or ETFs, if it is U.S.-dollar denominated and the greenback gets crushed, your investment portfolio can still take a beating.
I wholeheartedly believe that your investment portfolio should have some exposure to foreign currency, even if it's as simple as an EverBank CD. (Legal disclaimer: Insiders Strategy Group has a relationship with EverBank.) Many of these are FDIC insured and worthy of consideration. It's a simple strategy.
And as much sense as this makes, it was the diversification observation that sent my brain running off on a tangent and has me so disturbed.
Here's a chart from Credit Suisse. It identifies that the S&P has an extremely high correlation rate. In other words, no matter the sector, equities are rising and falling together.
Anyone who has watched Jim Cramer's Mad Money knows he has a segment called "Am I Diversified?" His shtick is to let callers know if they are covering enough sectors in their investment portfolios.
What this chart clearly shows is stock diversification really doesn't matter in a market with a high correlation rate.
You'll notice that we are at a 0.8% rate. Which, as you can see from the chart, is an extreme. The last time we were near this level was in 2008. I'll assume we all remember that little market hiccup in the last quarter of that year.
This single observation should make you rethink any long position you may have and either protect it with a stop or hedge it in some fashion.
What has me scratching my head is something written in Inside Investing Daily a few weeks ago.
It was titled "A Dire Correlation," and the point of the article was the stock market led the commodity market (as represented in the CRB index) down in 2008.
We were looking to find some indicator that would provide us with an edge in an attempt to get ahead of one market or the other today. It proved very reliable in 2008.

View larger chart
Now fast-forward to today.
The two-month chart pattern shows that when stocks have rallied (black line), commodities have rallied. When they fell, the CRB fell with it.
What was missed in that Daily was that these markets are positively correlated exactly like the Credit Suisse S&P chart.
Therein lies my dilemma.
This weekend a number of respected experts identified commodities as an excellent place to position yourself for the coming drop in the equity markets. However, if there is a high positive correlation, as we showed in the two-month chart above, and the pattern remains intact, then it's logical to assume a large fall in one will precipitate a fall in the other.
This begs the question, where do we go to take advantage of this observation?
The next chart won't be easy to stomach.
It shows the S&P and the U.S. Dollar Index. What it illustrates is that when the S&P is rallying, the dollar is falling. More importantly, when the S&P is falling, the dollar jumps.

View larger chart
When the market drops and people buy dollars, you hear the term flight to quality. However, in the past 15 years, I don't believe I've ever seen more market observers and participants so dead set against the buck as they are today.
If you're looking for the contrarian play, I believe you need look no further than the greenback. It's universally hated, so now is probably the time to buy. The Power Shares ETF US Dollar Index Bullish Fund (UUP:NYSE) would allow you to take advantage of this possibility.
P.S. I cannot tell you what a distinct pleasure it was to have met so many readers. Thank you.
 

Important Note: On Oct. 3, 2011, you'll see a big change in not only the way your e-letter looks, but the name itself. What's going on? We're changing the name of our company from Taipan Publishing Group to Insiders Strategy Group.
You see, Taipan is a Chinese word that refers to the head of a trading company. It's also the name of a venomous snake in Australia. We're neither of these. We are, however, committed to exposing Washington's dirty deeds as well as revealing Wall Street's most prized moneymaking strategies. And who better to do that than a team of ex-Wall Street "insiders" who are turning the tables on Wall Street to help you get rich?
That's why the new name of our company is the Insiders Strategy Group. But that's not all. We can't change our company name without also changing the name of your daily e-letter. Taipan Daily will now become Inside Investing Daily.
As I said, in October you'll see this name on all our email communications with you. To make sure you don't miss a single email, make sure you white-list us by adding our name to your email address book, otherwise your Internet service provider might not let our emails go through.