January 9th 2013
2013 gets off to, should I say, an interesting start. Volatility reared its head as the US avoided (for the time being) the fiscal ‘cliff’ which the markets had been waiting on the last few weeks: albeit congress still could not agree, and the US senate saving the day. The relief of some resolution, even if temporary, provided a lift to the equity markets, which have eased off slightly since.
So the theme of 2012 seems to be the theme to start this year too, with indecision by investors and traders on the direction of the global economy and outcome of the Eurozone crisis, leaving speculation on the sidelines. However, I don’t see this inactivity lasting for much longer…
Why? Well a few reasons… Firstly, the FTSE 100 is at a pivotal level around 6100. The last 3 years have seen this UK index range between 5000 & 6000 bar the odd blip respectively below and above these levels. In fact the FTSE traded above 6000 on 5 consecutive months in the first half of 2011 but failed to maintain the ‘6’ big figure in the second half, with the market retracing back to below 5000 in the autumn of that same year. 2012 saw a couple of attempts to break back above 6000, once at the beginning of the year and once at the end of the year, with a correction down towards 5000 in-between. So clearly we are at a critical level for the technical analysts amongst us. A break above 6100 could see the market head towards the all time high of 6950, last seen at the turn of the century! Failure to maintain these levels could see the market retrace again towards 5500 and then maybe lower again. Secondly, I have traded through a few market cycles in my time, and this is definitely the longest period of low volatility I have seen; if you believe that frequency is inversely proportional to magnitude, then we may be in for surprise in the coming months, as the market’s coiled spring unravels to deliver significant direction. Also, in my experience of trading the financial markets, when the big trading banks have been aggressively reducing their staffing levels, it has been near the bottom of the cycle, with brighter times ahead.
Without trying to place too much of a positive spin on the trading prospects for this year, we don’t have a huge amount of scheduled news for this year which could itself help move the markets, as any unexpected news release could be the driver for a directional move. Last year’s plethora of important elections, Eurozone crisis and QEs, resulted in many investors sitting on the sidelines waiting for the next scheduled announcement or election result; so hopefully this relative clean sheet will help provide some certainty as where we are headed in the coming months.