Be prepared for the turbulent autumn ahead

INVESTORS fed up with volatile, range-bound markets that apparently have little sense of clear direction will be cheering the end of the summer and the dust being swept off the City trading floors. But those hoping for an immediate return to normality and a bullish rebound are likely to be sorely disappointed.

The FTSE 100 has been drifting downwards as US economic data disappoints and Hindenburg Omens – a little-known market timing gauge which points to an imminent market crash – have been sighted and are hitting the investment pages and blogs on a disturbingly regular basis.

And things aren’t expected to get any better any time soon. While October might be more renowned for market crashes, historical data reveals that September is the worst month for market returns in the United States – the average September loss for the Dow between 1980 and 2010 was 1.25 per cent. In contrast, the much-maligned October enjoys average gains of about 1.2 per cent.

But with a choppy September to contend with first, what will happen to the FTSE 100 and how should traders be looking to play the markets?

After reaching the giddy heights of 5,833 back in April, the UK blue-chip index is now is struggling to stay above the psychologically important 5,000 level.

Richard Perry, chief market strategist at Central Markets, reckons that the FTSE could see further falls towards the mid-4000s once the market comes back to work: “A lot of people are talking about the market having a poor September and October; this seems to be supported by the charts and the fundamentals that are coming out.”

precarious position

He explains: “From a chart perspective the overriding feeling is that there continues to be a bearish look about the FTSE 100 Index. Although the original head and shoulders top pattern may have been recently aborted [which saw the index drop briefly below 5,000 in July] the long-term position continues to look rather precarious for the market bulls.”

Equally worrying, the 200-day moving average, which shows the long-term trend of the market, has stopped rising for the first time in a year and the sequence of higher lows, which is a bullish signal has been broken. Perry warns: “The index would probably now need to make a decisive move through 5,832 to defer what continues to look like an extended topping out phase.”

The buyers of the FTSE 100 just aren’t there at the moment. Simon Denham, managing director of Capital Spreads says: “Normally on a move down of 250 points we would be finding a large number of buyers looking for a bounce but this time they are almost matching themselves out.”

For retail traders looking to navigate a stormy September, it can be daunting to take positions that leave you exposed to unlimited losses and use leverage, even if you can set stop losses to ensure you don’t end up owing thousands of pounds.

By picking a covered warrant, you can bet on the FTSE 100 hitting at least a certain level on a pre-specified date. For example, if you think that the index is going to suffer over the next few months, then you could buy put covered warrants with a strike price of 5,000 with an expiry date of 17 December. Providing the index is trading at or below 5,000 on this date, you will have turned a profit and if it isn’t, then you only lose your initial investment.


However, you might be expecting an immediate decline followed by an upturn in the fourth quarter – markets tend to perform well at this time year, in what is known as a Santa rally.

To bet on a rally, you could buy a call covered warrant with a strike price of 5,400 with an expiry date of 17 December.

For those investors who are more risk averse, there are a range of autocalls and accelerated tracker products (see story on left hand page). For example, RBS’s UK Accelerated Tracker 3 product has a potential payout at expiry of two times any positive gain in the FTSE 100 and investors’ capital is protected providing the index has never fallen to or below 65 per cent of its initial level.

Post-crisis, we’re still a long way from market normality, whatever that might turn out to be. You can still keep your toe in the water, but don’t get swept away.