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There are four key momentum trades of the day, according to Gavekal, the Hong Kong-based financial services and research firm, which in a daily client newsletter gives us a run-down on what might possibly trigger a change of trends - including two somewhat radical proposals for the Fed to replace Treasuries with GSE bonds (ie, Fannie Mae, Freddie Mac) on its balance sheet; or else, to persuade foreign central banks to sell US Treasuries and buy GSE bonds.

The four main momentum trades now, in Gavekal’s view, are: 1) long US treasuries, 2) long commodities (including gold), 3) short credit and 4) short the dollar/long the euro. Right now, all these trades are “getting rather crowded,” notes Gavekal, “and the fundamentals argue they are due for a turnaround”.

Of course, there’s still significant risk that more landmines in the credit markets could provide further support to these trades, it adds. Moreover, the momentum in these trades is now so powerful that trying to catch the turn on the basis of fundamentals may be prove very costly. So, rather than attempting to predict the timing of a turnaround, it offers the following points of consideration:

• The market is now so bearish and so firmly convinced of a deep US recession that even a single major upside surprise - on US payrolls, ISM, housing or GDP growth - could cause a major move, prompting momentum-players to quickly shift from long to short. And since payrolls have a margin of error of around 100,000, an upside shock is possible the first Friday of any given month…. ISM and GDP are both much smoother series, but many investors are possibly underestimating the potential for an upside surprise from trade and/or inventories. Also, US housing is starting to look seriously cheap in relation to personal incomes and other affordability indicators, so forthcoming housing figures could confirm the recent tentative signs of home sales bottoming out (although housing starts and construction employment still have a very long way to fall).

• An even clearer effort by the Fed and the Treasury to narrow the spreads between Treasuries and GSE bonds [ie, Fannie Mae, Freddie Mac] could also trigger a reversal. After the Bear Stearns fiasco, getting the GSE spread back to below 40bp is now the Fed’s single most important objective. If this is not achieved by accepting GSE bonds as repo collateral, the government has two further options: One would be for the Fed to buy GSEs to replace Treasuries on its balance sheets. A less radical option might be to persuade the Chinese and Japanese central banks to increase their GSE holdings and reduce their Treasuries.

Foreign central banks have repeatedly been assured by US officials that GSEs are effectively government-guaranteed and as safe as Treasuries, so increasing their GSE portfolios would not raise their risk profile, argues Gavekal, noting that given the current spreads, it could even significantly increase their returns. “If the foreign central banks financed GSE purchases by discretely selling Treasuries, this would steepen the yield curve and under the present circumstances, would actually increase market confidence, rather than damage it”.