We have been leaning our trades more and more to the short side as the steady grind of the market moving higher has eventually given way to increased headwinds and an environment of renewed risk aversion.
The latest spook to the markets was from the US late on Friday, with news that the US Securities and Exchange Commission had charged Goldman Sachs, the US investment bank, with fraud related to subprime mortgages. This led to banking stocks across the board dropping, and the likes of Goldman’s falling 12% on the day. Although this story has a long way to play out, markets hate uncertainty and more regulation in the industry is not good. In fact, one gets the sense that the entire investment banking model is changing.
For traders like myself this is one of the hardest environments to try to trade. We need volatility and decent intraday swings to play the momentum, and what we have had in the last few months is the steady grind higher with half-a-percent moves a day. Last week the S&P moved above the magic 1 200 threshold since the first time since September 2008, helped by continued decent earnings out of the US. In fact, since March last year, the S&P has risen nearly 80%, which leaves it just more than 20% shy of the all-time high reached in October 2007.
By Monday morning, the S&P was back below it briefly, before flirting with the level again by the afternoon trade, and the elusive “pullback” never materialised. There was some follow through with Investec and Standard Bank giving back a couple of percent, but by Tuesday morning it was business as usual.
The frustrating thing is that there is plenty of news flow to digest at the moment, what with continued fiscal concerns out of Greece and the volcanic ash halting travel across Europe. Not even a stronger dollar, rising oil prices and the recent run towards 4% in the 10 US note yield appears to stop the equity markets grinding higher. But as we know, nothing goes up in a straight line and we continue to look ahead this week for some impetus to break us out of this cycle. If not, next week I’ll be reciting this in my sleep.
Nick Kunze is head of dealing, BJM Private Client Services
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