Summer markets arrive..
July 18th 2011
Summer markets are normally quiet, with liquidity waning while traders jet off to sunnier climates. However,
illiquidity combined with economic and social unrest can sometimes form a toxic concoction, leading to volatility
and trading opportunities for those who stay at home over the summer.
Equities are ranging aggressively as the dynamics of wanting to trade higher are dampened by a permanent
ticker tape of Eurozone crisis. Italy is fast becoming a greater concern than the traditional PIGS, most of which
have been bailed out by their Eurozone neighbours. This is perhaps aggravated by “the bigger they are the harder
they fall’ theory. However, Italy does have some key economic comparative strengths that are often ignored.
Italy’s deficit is the one of the lowest in Europe, and is a nation of savers with consumer debt around half that of
Spain. Additionally its personal mortgages are generally long-term, meaning consumers are less exposed to short
term increases in interest-rates. In other words, Europe is more exposed to Spain that Italy, in that the latter has
some key fundamental support on its side.
When there is little sight of good news even the professional end of the market can find these choppy conditions
difficult to trade. These “pros” will normally like to trade from the short side, but seem to be buying up equities on
the dips to take profits a few days later. This swing trading strategy is normally not their core approach as they
like to jump on moves, in the belief that the move will continue in the same direction.
As concerns over Italy materialise in what is a summer market, moves are probably going to be extreme but are
likely to create opportunities for those who are brave and have deep enough pockets to see the market move
against them before rebounding again.
In summary, the astute professional traders are buying into the weak equities market, with a weighting towards
Italian stocks. They are often favouring “pair” trades whereby they buy and sell the same asset class on the
expectation that one equity will outperform another. This hedges the trader should the market as a whole
collapse, while creating opportunity for profit if their selection is correct. Not a bad strategy in such choppy