With Market Uncertainty Comes Market Volatility

With Market Uncertainty Comes Market Volatility
by Mike Wright

Last week world stock markets made a decent stab at recovering from the previous week's rout. The strongest market was again the Nasdaq, with the new economy shrugging off the previous Friday's wobble to finish near its highs. Interest rate rumours thrust the market higher, as whispers of another 50 base point cut did the rounds. Few people wanted to be short going into what is expected to be another obliging FOMC meeting on Wednesday.

One survey showed that despite the attempted recovery, investors are still nervous. The AAII (American Association of Individual Investors) sentiment survey indicated that individual investors are feeling extremely bearish as the anniversary of 1987 passes. The news feeds continue to indicate that there is much to worry about, especially with the sub prime implosion still drawing out bad news and losses.

Merrill Lynch was forced to write down $7.9b in losses due to its sub prime exposure and the Federal Reserve added substantial liquidity to the slowly recovering credit markets. Oil prices topped $92 a barrel on supply and Iran concerns and even the rampant Chinese bull pulled back for breath.

However, it wasn't all doom and gloom last week as Microsoft beat analyst's estimates. The granddad of tech stocks rose on strong demand for its Vista operating system and sales of the Xbox 360. News also emerged that Microsoft had beaten Google to a 1.6% stake in Facebook. The price paid for the stake indicates that the social networking site is now valued at more than the UK supermarket Sainsburys.

The AAII sentiment survey can be a useful contrarian indicator, as the last time it reached readings of extreme optimism; the recent mini wobble wasn't far off. It sometimes pays to go in the opposite direction to the herd. In addition, according to the stock traders Almanac, November starts the best 6 months of the year historically. The average return on the Dow from May to October is 0.3%, but the average return from November to April is 7.9%. In addition next week displays significant seasonal strength with an average return of 3.3% in similar periods throughout history according to www.sentimentrader.com.

The currency markets were dominated by news flow on the Dollar last week. Despite a rally on Monday, the Greenback quickly flipped and fell to record lows against the Euro, Australian Dollar and Canadian Dollar. The next target for the Dollar/ Euro exchange rate could be the synthetic all time high of 1.4585 (Generated using USD/ Deutschmark data). Increased speculation of a rate cut fuelled much of the selling.

Next week is full of heavy hitting US economic announcements. Top of the list is of course the interest rate statement at 18.15 GMT. A quarter point cut is widely expected to be the more likely option, but there is still the possibility of a 'no change' or half point cut verdict. With uncertainty comes volatility, and that could be available in spades next week, with GDP data, and Non-farm employment figures on Wednesday.

Therefore a volatility play may be the best option for next week. With Betonmarkets.com an 'up or down' trade compensates you if the market hits one of two triggers that you set. It doesn't matter if it hits the higher or lower trigger, the market just has to move in either direction for you to win. An up or down trade with triggers set to roughly 2715 and 2850 on the Nasdaq returns 10% over 10 days. You may wish to wait until Wednesday before placing a similar trade to maximise your time.

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