Anatomy of An Arbitrage

Given the recent selloff in the Dow, we thought it might be a good time to update this post.

So here we are. This chart depicts, as of the close of last week, the Dow priced in dollars (nominal) and the Dow priced in dollars that have been normalized to the moves in the Euro. Click on the link for a description of the methodology. It's not rocket science.

The chart:

The trade was to sell the Dow, nominal and buy dollars (sell Euros).

While it was politically useful to attribute the selloff in the nominal Dow to the two-bit circus the president has made of his administration, it was more likely due to an unwinding of dollar shorts as the trade smelled the demise of Obamacare (via the election of Scott Brown in Massachusetts) and the outright destruction of the US economy it portended.