AS Barclays’ shares bounced back yesterday, this served as an important reminder to retail traders that the markets are not rational and it is easy to get your fingers burned. Anybody set up to take a short position on the FTSE open would have been hurt as the bank went on to be one of the strongest performers of the London session – up 3.4 per cent on the day to finish at 168.4p. But why? The public may have received its sacrificial offering in the form of chairman Marcus Agius’s resignation – and the move may have taken some pressure of chief executive Bob Diamond, who is due to testify to the Treasury select committee on Wednesday – but this does not change the fundamentals of the stock. Nor does it affect last week’s £290m fine for abusing the BBA Libor estimated interest rate, or the possibility of more heads tumbling. Although we’ve been spared a Leveson-type public enquiry, with Hugh Grant grilling Bob Diamond about the effects of a shifted Libor quote on a turbo swap position there will be a parliamentary inquiry into the Libor scandal.
But this is nothing new – once the markets got the scent of blood, it seemed that spread betters were as keen to short Facebook as retail investors were keen to blow the school fees on buying stocks in the first place. Trading according to the news headlines is the most straightforward and easy to understand approach out there – a bank receiving publicity is easier to grasp than a bullish engulfing candlestick pattern on a chart. According to Angus Campbell, head of sales at Capital Spreads, sometimes markets simply over-react to headlines and share price movements can go too far. “This is certainly the case with Barclays, where its share price plummeted some 15 per cent after the news of the Libor fixing scandal broke, and already yesterday we saw buyers dip their toes back into the stock thinking that it’s a bargain.” Other banks saw their share price rise, but with it unlikely that Barclays was the only bank to spit in the soup, other fines will follow. According to Campbell, last week’s fall presented a great opportunity to investors: “Of course, there’s no guarantee that they will add to yesterday’s bounce, but after such steep falls, its difficult not to think that they are now a buy.”
The Libor scandal will continue to run, but recent price action has been a lesson to traders of the dangers of trying to catch a falling knife, and it’s a lesson that is applicable to any stock being pounced upon by the markets.