Financial Spread Bet:
Having started 2009 moving relatively serenely through the gears, financial markets are now seemingly stuck in reverse, with little optimism apparent in the immediate road ahead.
With renewed negative data sure to come, the FSTE 100 looks like it will be regularly testing the 4000 level.
In mid January the UK’s Financial Service Authority lifted the short-selling ban on financial stocks. Prior to the lifting of the ban, investors were selling everything they could, perhaps a slight overreaction.
Should all investors now be selling banking sector shares? Right now the real problem appears to be the worry over the state of the balance sheets. And this does not appear to be going away.
Although some retailers reported reasonable Christmas sales, many did not. It looks like shoppers tightened the purse strings earlier than expected, once again leading to worries that the slowdown this year could be much worse than first thought.
It should be remembered that the stock market rallies at the beginning of 2009 were on light trading volumes.
As Simon Denham of Financial Spreads said, “We’re still in a bear market whether anyone likes it or not and the bounce from the November 2008 lows lasted 30 days in total. That happens to be the average length of time that bear market rallies last
“Technically the bears are still in control and from a fundamental standpoint the hot air coming from our politicians seems to be just that. And the market doesn’t like it. Many of the packages that the government is throwing at the private sector are just increasing the mountains of debt. It’s all very well guaranteeing loans but the businesses that take them will have to repay them and most likely at unfavourable rates”.
Will these loans simply keep non-profitable small businesses limping on and delay the inevitable graveyard that awaits them? In this current climate that is most likely to be the case.
Unfortunately, the damage that has been done, and the speed with which it has unfolded, means that the recovery will take a great deal longer than normal. A test of the FTSE 100’s all time high that ran out of steam in 2007 could be confined to the history books for quite some time.
It is clear that fiscal actions on their own are not going to be able to get the economy moving any quicker so other courses of action need to be considered. The worrying thing is that our central banks and politicians seem to think that a capitalist system that has effectively been undermined by huge mountains of debt and borrowing can be saved by vast amounts of debt and borrowing.
There is little doubt that we will be paying for these stimulus packages for most of our working lives and possibly our children will too.
So what should investors be doing? I like the principle of sitting on my hands and watching the markets fluctuate from the sidelines. For now, market fundamentals look terrible and I can see little upside. To the downside, the FTSE 100 support level of 4000 seems to be holding. If you must trade, then perhaps a few small stakes, short-term spread bets to take advantage of the market volatility. Some range trading may be the order of the day.
Spread bets carry a high level of risk to your money and may not suit all forms of investor. You can lose more than your initial investment so make sure you only speculate with capital that you can afford to lose. Likewise make sure you understand the risks involved and seek independent financial advice where necessary.
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