HEAD OF DERIVATIVES, GFT
THE FTSE 100 narrowly missed out on a record-breaking 12-day rally last week. After such a prodigious run for shares it’s exactly this sort of blip that could ultimately turn out to be the tipping point of the rally. With many traders getting their fingers burnt attempting to sell into these markets, is it finally time to get short?
Strategists are, of course, inevitably torn. On the one hand we have the overdue correction crowd, who claim that a retracement of at least 10 per cent is imminent, with the Dow to drop back all the way to 8,000 and for 500 points to be chopped off the FTSE. They say that stock markets have run out of steam.
But I’m on the other side. However fundamentally-flawed one believes the amazing recovery in global stocks to be, or whether you think there are still more skeletons in closets, we must remember above all that this rally has been built on expectations. The second-quarter US earnings season has been taken as a justification of those expectations, and if anything, has inflated them further still.
It’s my view, not as a fundamentalist or chartist but from a pure trading standpoint, that one should rarely try to pick a turning point. Embarking on such a campaign of picking bottoms and tops surely has to be one of the most frustrating ways of trading. Stick to trading the trends.
After an amazing run for shares over the past three weeks, it would be foolhardy not to think some profit-taking will kick in at some stage soon, even if only on a short term basis. But I think longer term there is still plenty in the tank.
Will we see the Dow at 10,000 this year? Such a question might seem premature given that we’ve not long broken the 9,000 level. After all, wasn’t it only back in February when we were pondering whether we could hit 5,000. But it all comes back to expectations. What we have been witnessing in the past few weeks is the markets pricing in a good third quarter. If we continue to see further surprises from the US economy, yes there could well be enough upward momentum to take us there. Certainly I think that is a much more realistic scenario than us hitting 8,000.
But the other point to bear in mind with market expectations about future returns is they tend to get over-cooked. Although I foresee a 10,000 level on the Dow this year as not unlikely, its sustainability is highly questionable.