Market Action Confirms Mexican Peso Trade

Although the market's future is always uncertain, the best approach is to take your cues from the market itself. The most immediate confirmation of a trade's potential is having a profit, even a small one, after a relatively short period of time.

Winning trades tend to start out as winning trades. Very seldom does an investment start out with a major decline only to turn around and rally 50% — at least within a reasonable period of time. More often than not, traders tend to get bogged down during extended bear markets, exactly why it's usually better to cut a loss quickly rather than dig in and ride it out.

But because markets move in trends, when a trade ticks even a percent higher that's an encouraging sign that, at least for now, I'm on the right track. As an indicator, that beats a research report or brokerage recommendation any day.

Case in point is the Mexican peso, which has risen modestly since I wrote about it last month. If the peso is eventually going to revisit its 2002 highs, as I believe it will, the trade still has plenty of room to run. (Use the CurrencyShares Mexican Peso ETF (FXM) to get exposure.) At least for the time being, the market is confirming my outlook.

Plus, there's no evidence this has become a popular or crowded trade among the "herd" with virtually zero blog, message board or media coverage. Yahoo (YHOO) and oil dominate the headlines these days, while the peso story hasn't yet even been told.

So while I trust my own analysis and judgment, once the trade is made it's a strong market and a quiet herd that are the most encouraging market signs you'll find.

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Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC.