So the last four closing prices have been covered by about 5 points.
This contraction of price action is causing something of a headache for market watchers. Is it a signal of the beginning of the end of the volatile periods of the last eight months? Or is it merely a pause before a big break out in either direction? The answer to this question is likely to make somebody very rich but at the moment we are no closer to its solution than five days ago. The volatility index (which measures future expectations of market risk) is near its lows of 2008, at around 20%, but even though the markets appear to be moribund this measure of future action seems to be struggling to go lower than the aforementioned 20% mark. In January and March the measure hit over 35% as we watched indices lurch every which way but since 2004 the 20pc level had been something of a peak which is presumably why it is now acting as a support.
In this scenario it is easy to become complacent that any move will create a counter move later in the session or the next day and it tempts traders into ‘opposing’ any market moves. If the Index rallies ‘sell it’, if it falls ‘buy it’. Unfortunately this is probably the single simplest way of turning a lot of money into a little as the adherent to this philosophy will always get caught out when the market does finally decide to break out one way or the other. But, I have to admit, at the moment our Capital Spreads clients who are following this simple strategy are doing very well indeed just at the moment. Sellers of everything above 6100 and buyers below 6050 have seen six separate opportunities in the last five days.
The announcement by the Fed of another 25bps off the base rate was not a surprise but it rather reinforces the worldwide impression that the US is following a policy of dollar devaluation (notwithstanding statements made by politicians). With Europe and the UK unlikely to follow with such dramatic rate reductions foreign currency players have only a poor return to contemplate when buying into the Greenback. This would not matter too much if the economy was perceived as being reasonably robust or if the trade balance was close to parity. Unfortunately the opposite is the actuality and so the dollar bears will continue to circle the markets for some considerable time.
This does not mean that the dollar will necessarily decline, as much world business outside of the US takes place in dollars, but it does make a serious rally less likely in the short to medium term. If the US does drift into a recession (we are not in one yet no matter what you read) then the prospects (as with the pound) do not look rosy.
The above comments do not constitute investment advice and neither Capital Spreads nor Clean Financial accept any responsibility for any use that may be made of them.
Risk Warning: Spread betting carries a high level of risk to your capital. You may lose more than your initial investment. It may not be suitable for all investors. Only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved and seek independent financial advice where necessary.
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'Spread Betting on Unchanged Markets' edited by SD, updated 02-May-08
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