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The silly season

Created:
18 August 2008
Written by:
Marc Rivalland

August is the silly season, not only in politics and journalism, but also in the stock markets. Traded volume has already been fairly low, and the next fortnight traditionally sees the lowest volumes of the year in the US apart from the final two weeks of December. Low volumes mean exaggerated and untrustworthy price movements. Look at the daft movements in the currency markets. Has there been any new and significant fundamental information in the last ten trading days which has caused this seismic shift? In my opinion, there has been virtually nothing to justify such movement. All of the explanations seem to me to be post-event rationalisations.

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Efficient markets my foot! That theory is so much claptrap. No wonder we chartists can make money out of the markets in the short-term. The markets are indeed a highly sophisticated discounting mechanism but they are overlaid with a collective psychology which is immeasurable and influences the risk premium, among other things. Most important of all, it appears to be unstable and inefficient.

Don't get me wrong, I am not complaining. The strength in the dollar helps me because a large part of my trading is in US derivatives and my profits and margin requirements are denominated in US dollars. Also, without the fall in the oil price, it would appear that the markets would be much worse off. While I banked nice profits on the Nasdaq 100 buy-signal at 1876, I set stop-losses on my FTSE 100 and S&P 500 long positions at the point of entry because they were taking too long to bear fruit. That may well be too impatient, but that's how I am. It's also my perhaps imperfect way of fitting in with the important rules of trading. They are:

a. Have a method. Abandon judgment. It's your enemy.

b. Do not use too much borrowed money in your positions, else a rough patch will put you in a hole where you could end up staying.

c. Minimise your losses. There'll always be lots of profitable opportunities, but if you need them just to get back to breakeven, you're missing the boat.

I do have some naked put options with strikes below the trend-change points which should be watched carefully. If the FTSE 100 falls below 5298, or the Dow Jones drops below 11220, the summer rally has ended. But it may not happen. Unimpressive though the FTSE has been, it is, in fact, slightly closer to giving a repeat buy-signal than any negative signal. If it forms an up-bar - higher high, higher low - any time from Tuesday 19 August onwards, the repeat signal will be given. I am also watching the Nasdaq like a hawk for a chance to re-establish long positions.

The euro and sterling charts do look very toppy. There will doubtless be heavy resistance which will dampen any strong rallies for a while. But I suspect that when the A-team gets back from summer holidays they may baulk at the idea of shorting the euro below 1.47. I wouldn't buy the dollar at this level. If the euro rallied over 1.52, it might be worth a quick short-sale.

Prudential has one of the most attractive looking charts amongst UK stocks but in the silly season, it is unlikely to deviate much from the general market. Index futures or spread-bets would work just as well and they would eliminate specific company risk.

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