Markets have clearly got a bit more nervous as we move into June and the Greek problems seem to be creating a bit more worry in the Markets. Summer is always a difficult time for Markets and I always like to be heavily into Cash and/or, like this year, to have big Shorts on to Hedge my Long Portfolio.
I thought it might be helpful to Readers to give a view on how I intend to play things from here and it will help me get my thoughts clear and help my forward thinking. You may have seen from some Blogs and stuff that I very much like to be ahead of the game (hey, it’s essential if I really am going to beat the Bears), and having a Strategic Plan for the coming months is utterly vital I feel - it’s my Roadmap.
This Blog contains some general thoughts on how I think things will play out and how I am positioned.
According to the UK Stockmarket Almanac 2015, June is the 2nd worst Month of the Year for the FTSE100 and on Average it tends to rise only 39% of the time and the Average fall is 0.9%. In fact, since 2000, the trend has got worse with an Average fall in June of 1.7% and the FTSE100 has only risen for 1 June in the last 8 years.
Slightly shorter term, this coming week (commencing 8th June 2015) tends to rise on Average for 48% of the time but the Average fall is 0.4%. Looking at the Major Index Charts, I think we might see a bounce in coming days but I expect the Markets to go lower over the course of June.
Summer is always a bit soggy and lighter trading volumes tend to lead to raised volatility - and it closes with the worst Month of the Year which is September - so for me this is not a time for being a Gung-Ho Bull.
It’s an unfortunate coincidence that the Weakest Season for Markets happens to coincide with the fiasco around Greece. However things play out, it is pretty obvious that with the IMF Payments rolled up to the end of June, then the ‘Negotiations’ are going to drag on and on through the month and these will probably create moments of both Optimism and Despair.
Anyone with half a brain can see that the only Solution that will work in any sustainable Long Term sense is for Greece to default and leave the Euro. The danger for Investors is that the idiots running the EU will put their political priorities at home above the wellbeing of the Greek People or the EU for that matter. Any more ‘kicking the can down the road’ will just mean that we go through this fiasco again and again - and all the while politics in Greece will become more radical and they will be turning towards Russia.
If a ‘deal’ is done at the end of June then Markets will probably be happy but I do not expect much of a Rally - it might be like the UK General Election - we will most likely get a sharp Pop which then runs out of puff quite fast.
The worst possible scenario for Investors is if Greece leaves the Euro and defaults in a disorganised and ‘accidental’ fashion (‘Grexitdent‘). This could cause a Lehman Collapse type moment where Markets freeze up and Liquidity disappears as Fear goes through the roof. However, I expect this would be sharp and short - after all, the Greek economy is tiny and most of the Debt is now owed to Public Bodies like Governments and Central Banks and not to the Private Sector - so banks are fairly well insulated.
The best scenario would be a properly managed and executed Grexit - this would be best for everyone concerned - if only they have the good sense to actually do it. I expect Markets would quickly shrug such a Grexit off and set us up for a good finish to 2015.
It looks likely that the ‘Bubble’ in the Bond Market is finally bursting - ok, many would argue it was/is not a Bubble but whatever you call it, a situation where you pay governments to borrow money from you is clearly bonkers.
There have been big rises in Bond Yields in recent weeks and Bond Prices have fallen (Prices of Bonds move inversely to their Yields) - this also suggests that Interest Rates around the World are likely to start rising. The Federal Reserve in the US is the Central Bank that the Market’s are obsessed by and eyes are focused on when the next Rate Rise will come. The key thing to realise here is not that the Rate Rise will be of any great size, but that it denotes the Interest Rate Cycle is starting to turn towards a trend of rises. This is not necessarily a huge worry for Stock Investors as Stocks can do well even with Interest Rates up around 5% or so - but it might cause Short Term shenanigans and volatility.
However, having said all of the above, I am of the view in general that Markets tend to move BEFORE the News - quite often the News is just an ‘excuse’ for a Sell-off and the Media certainly has to have a reason for any falls. Most moves are in the Charts and Technicals before the happen.
Outlook for 2015
Ok, as I have mentioned, I expect Summer to be rough, with swings up and down, and we will most likely get big Falls in either September or October - so I will be tuned into these possible occurrences and scouring the Charts for Technical signs that the Falls are on the way.
Following an Autumn Shock (I call it a shock because the Media and most Market Participants will be totally surprised by this - despite the fact it happens nearly even year), I expect a good Winter as per what we usually get. As I see it, Equities are still the ‘Only Game in Town’ and with Bond Markets falling as Yields rise, people will really like the look of Equities with superior dividend yields. In addition, an environment of rising Interest Rates will coincide with a growing Economy and it is the latter which has more effect on Stockmarket Returns. Stocks tend to gain in a rising Interest Rate environment until the rate gets over 5 to 6%. To be clear, I expect the Bull Market in Stocks to run a lot further yet.
The unknown for me is whether or not we can make New Highs for the FTSE100 later in 2015. It might be the case that after an Autumn Drop, the Markets are only able to get back up to the recent Highs of the FTSE100 around 7122 - this will be a strong Resistance Area. However, if we fail to take out these levels later in 2015, there is a good chance we will see a Breakout in early 2016 - probably January, which often starts off with a flyer.
At present I have Big FTSE100 Short Hedges both using Spreadbets and the XUKS ETF (Exchange Traded Fund which can be bought in an ISA or SIPP and gives Short Exposure to the FTSE100). My Short Positions are equivalent in value to about 40% of my Long Exposure - I have considered adding more but with my current level of Spreadbets, I have effectively removed all Downside Risk to my Spreadbet Portfolio but the Danger is that if I was to go too heavily on the Short side, I could get myself in big trouble if the Markets rise strongly. The Leverage in Spreadbets can be a killer - I am always monitoring my Exposure and making sure I am not putting myself in a situation of uncontrolled Risk.
In addition, I have about 3% in Cash, which is down quite a bit as I have been buying selectively in some great Stocks like EMR, IOM, AVAP, SIV, RDSB as they have thrown up opportunities. As ever, all details of my Trades and Portfolios can be found on my ‘Trades/Portfolios’ webpage.
I would ideally love the Markets to really tank in the next few weeks - this would enable me to unwind my Hedges (in other words, buy back the Shorts) and give me full Long Side exposure for when Markets bounce back - which could well happen in July. I would most likely use my small bit of Cash to buy a few Bargains and I might take on a tiny bit of extra Leverage via Long Spreadbets - but I will not get too carried away over the Summer.
If Markets do not make a decisive lurch down, then I will happily sit with my Shorts on with the intention (and hope !!) that we will get big falls in the Autumn when I can then unwind these positions. It is not ideal to run Hedges for so long as they have an Interest Charge - but it is a price worth paying to avoid Downside Risk - after all, Upside Risk will not hurt me - Downside Risk is what I want to avoid.
If we do get a big Autumn Drop, then I will take on more Long Side Leverage to set me up for a Strong Winter. I am still trying to reduce my Number of Positions, so I will most likely be just topping up on existing Stocks I hold.
It is worth noting here that if Interest Rates rise quite a bit, there will become a point where holding Shorts for a long time is not cost-effective. We are nowhere near there yet, but if we have Rates up around 3 to 4% then maybe holding Hedges long term will not be a good idea. In which case, I will probably use Stoplosses on them.
OK, that’s my Roadmap.
Happy Hunting !!