FTSE traders torn between two directions

THE FTSE 100 closed 63 points up at 5,565.5 points yesterday, rallying to a four-month high. Good banking and mining figures drove it upwards and a clear momentum emerged.

While the upturn is indisputable, the jury is out on how long it will last. The index is out on a limb and opinion is split on whether its exposure to the Dax or Dow Jones’ choppy movements could drag it downwards. Little seems to be giving the American and German indexes any significant headway in either direction. Last week the Dax wobbled its way through a slide in factory orders and closed yesterday at 6,261.68. The German blue-chip index has been trading broadly sideways since early April. Across the Atlantic, the US unemployment figures last week gave little steer to the Dow Jones, which continued to chop its way around its usual trading range between 9,700 and 10,700.

In these volatile circumstances it can be very difficult for the contracts for difference (CFD) trader to decide whether to take a short or a long position on the UK?FTSE?100 index. So what do the experts say?

Rather unhelpfully for the undecided, they seem to have herded themselves into the bull and bear pens in equal numbers. The bears say that the FTSE’s 60 per cent international make-up leaves it vulnerable to foreign markets, whilst the bulls think that the index’s diversity protects and allows it to carve out its own path.

In the bull camp Clem Chambers of European financial market website ADVFN says he thinks we are in an upswing and that only the double-dip believers should be bearish in the next three to six months. In contrast, Gavin Pugh of Spreadex says that he would be surprised if the FTSE did not start to level off, pointing out that austerity measures will soon start to be felt by consumers tightening their belts.


Still more bearishly, Margaret Hurn, an indices trader at Cantor Index warns: “Although a huge drop in the index is unlikely, our clients are of the opinion that the end of the year will be marked by a period of continued slow growth.”

Looking back, the UK index seems to have fared better than its peers in recent weeks due to higher exposure to defensive sectors such as drugs, tobacco and food, not to mention the advantage of exclusion from the single currency.

The FTSE strength therefore could partly be down to the Dax’s weakness. The UK benefits from being outside the Eurozone and Britain has allowed sterling to weaken considerably over recent years in order to make exports more competitive and give net trade a boost. The ongoing worries about the single currency and the 16-country Eurozone has seen investors eschew the Dax in favour of the FTSE.

Traders seem to have sided with the bulls at least for the meantime. David Jones of IG Index says: “We are seeing lots of people putting in stop losses below the 5,530 mark.” This indicates that traders are confident enough to allow room for the FTSE to be volatile, believing that it will bounce back so they do not want to be stopped out too soon.

low volumes
While this is a good sign for a further climb, CFD traders should be wary of relying on summer levels as indicative of wider market sentiment as Cantor Index’s Hurn warns that volumes were very low over the summer.

To look for the beginnings of change there are plenty of figures to look out for. ADVFN’s Chambers suggests that traders should forget about the latest earnings releases and instead focus on how the banks and currencies fare.

Wednesday’s UK unemployment results, Thursday’s retail sales data and Friday’s US inflation figures will no doubt rock the FTSE boat, but the CFD trader should try not to be too distracted by short term volatility if he is intending to stay in the market for the next three to six months.