VIx Fix

The market's rally continued this week, although with reducing volatility. In fact the volatility is reaching multi-year lows and we feel bottoming out, preparing for a move to the upside. After a 11% + rally over the summer months, the markets moves to the upside are becoming more limited especially without any natural 'healthy' correction. With this in mind we increased our down position, as stated, by an extra 3 contracts at 1413. Our target has to be re-adjusted to 1380 and a stop-loss of 1429 for this week.

Fundamentals

At the risk of sounding like a stuck record, the markets are completely ignoring economic news on the hope of more monetary stimulus. However, whether it be last week's UK industrial production or China's trade position the numbers are pointing to a severe slowdown that we feel has to be factored in when the only stimulus being offered thus far is that of rhetoric. We are continuing to hold our short position and this week will add 3 more short contracts should the market rally up to 1413. Our target for the week is 1370, where we will take profits.

All Talk

Expectations were running high this week, that the central bankers would produce the big bazooka's promised in various preceding speeches. In actuality it was just more empty promises, that the market was not convinced about until an abrupt turn of sentiment on Friday, leading to a very unexpected gain for the week. We suspect there may be an unreported story here concerning the Knight trading software fiasco and an effort to flood the market with short term liquidity to avert any panic.  However, events last week have effectively changed nothing and we continue to hold our short position and strategy from last week, excepting that we will not add to our short position above 1400 and our target price this week is 1342.

Tug of War

As expected, volatility was the name of the game last week. Fortunately Apples' weaker than expected numbers on Tuesday gave us the opportunity to realise our profits at our target price of 1330. The market is currently being pulled between the two conflicting forces of slower economic growth on one hand and the injection of new liquidity by the world's central bankers on the other. Thursday and Friday's rally has left the market still in an unresolved state to the downside, so for the forthcoming week we will re-enter our short position, recommending an immediate sale £6 per point first thing Monday, we will sell a further £4 per point at 1397 and a final £6 per point should the market rally up to 1413. A stop loss should be set at 1427. Our target price this week is 1334.

Viva La Espana ?

Despite the majority of economic data being poor, the market continued to focus on expectations of yet more QE. What was surprising was how the market held up after Chairman Bernanke's testimony, when no new money was added, just more vague promises. Could it be that the Federal Reserve now realises the   debt outstanding is now so large that the effects of printing more will be minimal, and so talking about it is one of the few tools left ?
This leaves the market in a continued vulnerable state, that was aptly demonstrated on Friday, when the Spanish region of Valencia made it known they were running out of money. Over this week-end we hear that another region, Catalonia, is also in trouble. We therefore expect weakness this week and our current short position still stands with a target price of 1330. We will of course be watching Apple's results on Tuesday, and with a raft of other technology companies reporting, it could be a volatile week.

Unresolved

Over the last couple of weeks, the market did indeed fall close to our target price of 1320. Unfortunately and in spite of weak Chinese GDP data, Friday saw a rally in the market that managed to turn the index positive for the week. We feel this has left the market in an unresolved state to the downside, however following Friday's rally we are adjusting our target price upwards to 1330 or below where we will take profits.

Economic Reality

Up until Friday this week, the market was showing the signs of a 'wait and see' stance as predicted, awaiting the month and quarter end.  Was Friday's blow out rise a demonstration of the market's vain hope that the promise of ever-lasting central bank liquidity will trump the economic fundamentals ? We are of the view that Friday was nothing more than an engineered bout of short-covering, as the large market players sat it out on the sidelines. This has NOT left the market, on a quarterly basis, oversold and so we expect medium term pressure still to be on the downside, as it dawns on everyone that a severely slowing world economy can not be solved by adding yet more debt.
This forthcoming week we advocate a maximum position of £12 per point on the short side. We recommend selling an initial 5 contracts above 1361, selling a further 3 above 1368 and finally selling a further 4 contracts above 1383. We will set a stop-loss at 1395, and a target of any price below 1320 where we will take profits. For actual trades visit : Portfolio