Should I close my FTSE100 Short Hedge?

Well, what a difference a few days makes - last week I was verging on suicidal, this week I am relaxed and all is well in the world - apart from nasty winds which has scared me off dinner with a mate and a lovely Pasta bake…….

Anyway, what should I do with my FTSE100 Short Hedge? As you may have picked up from my various recent missives, I hate doing anything in a rush without proper consideration. So, I have been thinking long and hard about this today.

The simple fact is that I think that something Drastic has happened to the ‘markets’. For most of the last 3 years, stocks have generally charged upwards in a stampede of bulls hooves and any idiot could buy a stock and make money (hey, I made some money so proves it right?!!). Now I think things have got tougher and I probably need to trade slightly more often and take profits a bit earlier. 

The big change is European Slowdown. ‘Club Med’ states like Greece, Spain, Portugal, Italy etc. have been in dire economic trouble for many years with no growth and horrific levels of unemployment - especially among the young. I think I read somewhere that Greece had 52% Youth Unemployment…..even during the worst of the late 70s, early 80s recessions unemployment in the UK got nowhere near this. It must be horrible for the people - I feel for them.

The concern I have here (and clearly the market shares this) is that the European Sovereign Debt crisis will erupt again. With little or minimal growth in the Eurozone (and possibly even recession) the debt problem of the Peripheral States can only get worse - and the ECB (European Central Bank) has a lot of talk, but doesn’t seem to do a lot (I sympathise with Mario Draghi as the Politicians in general have done little to reform their Socialist, Bureaucratic, anti-business economies).

The simple fact is that the Euro Currency straightjacket can never work without Fiscal Transfers of cash from the richer states to the poorer ones - and German voters will probably not be too keen on this. The ‘best’ scenario to comfort the markets is to see some good old QE (Quantitative Easing - money printing) - but we might have many months and lots of Political Shenanigans before this happens.

Right, sorry about all that verbose blurb - let’s get down to business. Despite a good start to this week, I feel we are most likely in a new range between about maybe 6200 and 6600 on the FTSE100. My bet is that this range could last for some time with the price moving up and down between these levels for several months perhaps. In the worst case scenario, we could break down below this range.

At the top end of my expected range, there is resistance at about 6500 and if this gets pushed through, then more resistance at 6550. At 6600 the resistance will be very strong and probably too much for the market to get through. Whatever happens, on a longer view, I think a break above the All Time High of about 6900 is extremely unlikely - the Resistance at this level is now immense. Thinking ahead a long way, if I see 6900, I will be sticking shorts on.

At the bottom end of the range, we have a low put in from last Thursday 16th October 2014 at 6070 and I expect this to be very strong support - failure here would be very nasty and probably mean we could visit 5800 or lower. The support at 6200 looks good and I suspect this will be the bottom of the range.

The rationale for my FTSE100 Short Hedge is to effectively reduce my Total Exposure to the market without the hassle and expense of selling some of my great stocks in my Portfolio. Due to my fears over Europe and my belief of a defined range developing between 6200 and 6600, I will keep the Short open and monitor it closely. This may be a big mistake and could cost me a lot of dosh - although of course the losses on the Short are more than offset by my gains on my Long share Portfolio. If it does go wrong, maybe in future I should have a tight stop on such Short Hedges and close it out very quickly for a tiny loss. Let’s see how it develops…………..