Written by Charlie Menegatos

Friday, June 19, 2009

According to Accendo Markets’ research team, we seem to have arrived at a tipping point as regards the fate of the post March stock market rally. Whether the markets have factored in, or over factored in a possible recovery is as yet unclear, and the latest economic data does little to clarify the overall picture. Add to this the negative comments from the Bank of England over the “green shoots”, and even those buying the current dip in stocks must feel a little uncomfortable

All Factored In
After a good three months of near euphoria over the seemingly unstoppable market recovery, coupled with the occasional bout of panic buying, June has introduced a markedly different feel into the mix for Accendo Markets. Bulls and bears have cancelled each other out, while the FTSE 100 has become repeatedly stuck in a 4,300 – 4,500 range, and then gradually declined below post the May support level of 4,300. This is largely due to concerns over a second leg to the Credit Crunch, fuelled by evidence of sharply increasing rates in the credit markets and a spike in Treasury Bond yields which suggests that interest rates will have to be raised sooner rather than later. Fears of rising interest rates may prove largely unfounded, considering that banks were only keen to pass on rock bottom interest rates to savers rather than borrowers, and also the fact that the likes of Nationwide and Lloyds Banking have raised their fixed rate mortgages costs by up to 1% suggests the risk of any increases will be “headed off at the pass.” Accendo Markets also notes that the fact that the Bank of England has been keen to avoid “green shoots” talk and instead go with a sluggish return to form for the economy.
Even if the BoE are wrong and there is an end to recession this year, the rise in the stock market from below 3,500 to over 4,500 at best does seem to have all bases covered as regards the end of the Credit Crunch. Bulls can be reasonably hopeful going forward, and even if the stock market has got it wrong and there is a new downturn, Accendo Markets believes any sell off should be limited and not too painful.

Trading Strategy:
There seems to be a fairly obvious course of action for traders with Accendo Markets looking at UK stocks and CFDs at the moment. Since May, the FTSE100 has been range bound between 4,300 – 4,500, although this has clearly been broken this week. Optimists may want to wait to see an end of week close below 4,300, or even a test of this level as new resistance. But a clear and immediate course of action should be to go short now. The question is what stocks to short? Miners have already been hit, in case of a fall in demand from the BRIC countries, and also because it is the area of the market most highly geared to the end of the downturn. Perhaps the easiest way for traders to protect themselves against a possible new bear phase would be focus on banks and financials, which though off the top already could well suffer further if the recovery is delayed. And unpopular decisions such as Lloyds Banking Group upping interest rates just as the Bank of England has left interest rates at record lows for another month will only serve to reinforce the bear argument. The sell argument for the sector purely on a short 4 – 6 week basis does seem well backed.