Follow the Bears Down Under for Profits

Although U.S. equities have posted stellar returns in 2012, the bullish festivities have thus far been largely a domestic affair. China, Europe and most emerging markets have watched from afar as the U.S. markets have climbed to new bull market heights.

While emerging markets received a much-needed boost in response to the recent announcement of QE3, it remains to be seen whether the Fed-induced euphoria will lead to lasting change. With ongoing signs of a global economic slowdown, the possibility remains that emerging markets will continue to underperform.

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The accompanying chart includes a comparative relative strength study (green line) showing the iShares MSCI Emerging Markets Index (NYSE:EEM) has exhibited relative weakness versus the S&P 500 Index for much of the year.

With its rich natural resources and export-based economy, Australia is one potential victim of poor global growth. Traders looking for bearish exposure to the country down under might consider structuring positions on the CurrencyShares Australian Dollar Trust (NYSE:FXA).

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One play worth consideration is entering the November 105-101 bear put spread. To initiate the position, traders would buy to open the Nov 105 put while selling to open the 101 put for a net debit of $1.60 or better.

The max risk is limited to the initial $1.60 paid at trade inception, and will be incurred if FXA sits above $105 at November expiration. The max reward is limited to the distance between strikes minus the net debit ($4 – $1.60 = $2.40) and will be captured if FXA resides beneath $101 at November expiration.

Note: Liquidity is a bit lacking in FXA options, so traders should use limit orders to ensure the best fill possible on their orders.

In the event the pace of global growth worsens and/or risk aversion seizes investors heading into year’s end, the Australian dollar should be one victim on the casualty list.

As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.

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