R opening to a flurry of optimism – following this weekend’s agreement to bail out Spanish banks – stock markets had sunk back down by the end of yesterday. It’s business as usual for Europe, and business is usually pretty bad right now.
“Friday’s late price action on the Ibex 35 was indicative – traders believed that a deal was in the offing as the Spanish index rallied 2 per cent on the day,” explains GFT’s David Morrison. However, trading on a rumour can be risky and there were plenty of rumours and false-starts before the announcement of the Spanish banking bailout. “This makes it difficult for traders to profit from such news without taking on significant risk,” says Morrison.
For those that saw the retrenchment coming (and think it will happen again), “one approach is to fade the move” says David Jones, chief market strategist at IG Index. “Assume the market has over-reacted and look to profit from a return to normality. Clearly this can be dangerous in the face of a strong trend, but if the market has shown signs of faltering, selling short with a stop-loss over the most recent high could be a worthwhile strategy.”
Brenda Kelly of CMC Markets point out a hotspot of volatility: the FTSE Mib. “It consists of a mixture of the 40 largest companies in Italy, with banking and utilities dominating the mix. It has seen some massive moves for the most part, due to its exposure to Spain and fears that Italy could be the next domino to fall.” She adds: “when you consider that the index can do a full-round trip of 400-600 points in the course of a day, it can provide a significant amount of profit for the savvy trader.”
It’s tempting to over-exaggerate yesterday’s stock market movements. Perspective comes in a three-month chart of the Ibex 35, the benchmark stock market index for Spain’s principal stock exchange. Rather than a huge rise and fall, yesterday’s move is dwarfed by a broader trend of decline
With few relevant data releases this working week, traders and investors will be waiting until Sunday’s Greek election, when the public gives voice to their prolonged tragedy. Expect volatility, with trigger-happy investors jumping in and out of the markets. But whatever the result, get ready to ride the trend and short any optimism as it bursts.
It’s difficult to keep your head while all around you appear to be loosing theirs. But remember the trend is your friend and as Craig Erlam of Alpari explains, the trend has been: “Eurozone leaders come up with the miracle cure for the debt crisis which sends markets skywards, and before you know it, they’ve fallen back again.” Equity gains will continue to quickly turn sour as soon as the sugar rush has burned off.