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Stocks looking rich – Short Trade on UK100

Market Analysis
2016-07-14_17-55-49

UK100, Daily             

Last week I did what I always say not to do, I reacted and actioned what I “thought” was a right decision. Based on only a couple of fundamental pieces of news and without a clear technical formation or set of indicators to back my decision.  I went short on the UK100 on Thursday based simply on a “feeling” aware that I was jumping the gun technically and aware that a lot of fundamentals will suggest that the UK100 has further to run higher.

The BOE are very likely to cut rates at their August meeting AND increase the QE expenditure (especially as they did nothing last week and Mr Carney emphasized a “summer” move) Sterling continues to languish (great for ARM shareholders and other UK M&A targets).  UK stocks are managing to outperform today with the FTSE 100 still in the black with a 0.3% gain. News that Softbank’s agreement buy the UK’ Arm Holdings for a whopping GBP 24.3 bln, has underpinned the UK equity market. Phillip Hammond, freshly installed as the new chancellor, has approved the takeover. In the US we have had consecutive all-time highs for the major stock indices and we are also heading into the busiest week of the second quarter earnings season.  Some major stocks outperformed last week.

Technically, for the UK100 Daily, the moving averages are nicely aligned if a little over stretched, the Bollinger bands are pointing north and the candles suggest further advance is possible.  So why take a contrarian position?

The volatility index VIX (below 13) looks too low and too comfortable, valuations on the US indexes are over 20 forward earnings and even with negative interest rates and negative bond yields it’s still pretty rich. It’s also July, and the third week is not a great week for UK stock markets traditionally.  It was these “thoughts” that generated a contrarian short position at 6720 with Target 1 at 6590 and Target 2 6455.  It also emphasized that if trades “feel” correct they can work out without having all the technical and fundamentals in your favour.  With strict risk management you do not have to be correct all the time and you do not need to be 100% certain each time you place a trade. Time will tell if this position is successful, whether it is or not I always learn something from each and every trade.

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Stuart Cowell

Market Analyst

HotForex

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