Bizhack.net

Judging by the tones of these articles and the weakness of economic data emerging from the US and Euroland (and now emerging markets as well), the future does not bode well. Data watchers are waiting for the NBER’s (www.nber.org/), as the official arbiter, to retrospectively call the start of the US recession and the UK has more news from Halifax this time about house prices plummeting.

Stock markets on the other hand are well off March lows painting a rosy picture for future company earnings and therefore future economic performance. This kind of disconnect manifests itself frequently and can be attributed to Keynes’ ‘animal spirits’. A telling picture, however, is that despite healthy rebounds, the main stock indices: FTSE for the UK, S&P for the US, Nikkei for Japan and Dax for Germany, have all failed to surpass their 200 day moving averages (just a rolling average of the last 200 days readings). This commonly watched medium term technical variable implies that the markets have been unable to break through a significant resistance level into an ‘everything is ok’ scenario.

Market dislocations are one of the most difficult climates for economically based traders, like myself, to reconcile and make money in. Arguably the biggest dislocation, and certainly the one that has received the most attention, is the oil price. Aside from discussing the well covered fundamental side of this market: inflationary impacts, increasing and subsidised demand from emerging markets, inelastic demand from developed markets etc… it is worth mentioning the actual market itself. The most commonly quoted price is West Texas Intermediate (WTI, traded electronically and on the floor in New York), which as the name refers is supposed to reflect the pump price in Texas on a specific date. Quite a lot of political attention is being trained on this market mainly because politicians need to be seen to be doing something to stop the runaway train that has become the oil price. This would normally be completely useless, however this particular commodity is opaque in that there is no publicly reported information on who holds how many contracts, in particular the influence of speculators versus commercial traders is not known. The US regulator (CFTC) is currently continuing its investigation into this particular market and any manipulations that may be taking place, but this author believes this will not change anything in a market where inside information is legal.

In conclusion, I’ll be closely watching both stocks and commodities (particularly oil), but given my lack of detailed insider knowledge will tend to trade the former. Advice for you? If like me you think that economic fundamentals will win out over market sentiment and are therefore that stocks are due for a shake out I recommend you hedge any exposure you may have to falling markets (a spread-bet on an index is probably easiest) through your ISAs, or IRA / 401Ks or whatever they’re called. More generally, don’t short term trade in things you don’t know or don’t understand, and if you’re investing (as we all have to nowadays) do so over long term horizons say 5-10 years.