We’re coming up to that time of year again – the time when the experienced traders start to think about Holidays and shopping and seasons in the sun, and leave the trading desks in the shaky hands of the 24-year-olds with something to prove.
One consequence is that the markets start to display a lot more of what former Fed Chairman Alan Greenspan called “irrational exuberance” and sharp price swings that simply have no relationship to normal economic activity.
The prevalence of High Frequency Trading programs – now about 50-60 per cent of the equity markets – and their tendency to go nuts every once in a while just makes the problem worse.
AN UPSIDE-DOWN WORLD
In this upside-down world bad news is good news (because bad economic reports discourage the Fed from slowing quantitative easing) and good news is also … good news. Until it isn’t.
It is a tough market to trade, because the usual signals become unreliable. They could mean anything.
One perfectly rational response is to stand aside with your hand firmly camped on your wallet and wait for the silly season to end. You risk missing some good end-of-year moves … but you also miss risking the sudden surges and down drafts that can ruin your holiday.
WHAT WE LIKE
The other approach is to pick a couple of areas where you can find relatively low-risk entries and ride them into the new year, hoping to catch the wave. Here are a couple of swing trades we’re looking at.
• Short Oil. Oil has dropped close to its long-term support and 95.75 acts as the current resistance line. As long as this resistance continues to hold the price down, the long-term support level below 90 is likely to be broken in the coming weeks. A pop above 95.75 — but stopping short of 100 — will likely bring more sellers into the market. Barring an outbreak of war in the Middle East that would offer an attractive entry level.
• Long gold. Don’t move on this too early, because gold is still getting hammered lower and is in a clear downtrend. But the last of the buyers will be giving up soon and a move down to form a double bottom with June’s low around 1180 or lower toward 1150 will be a good low-risk entry.
• Short the long bond … maybe. The 20-year bond Ishares (TLT) have been establishing a support level around 102 since late August. The price has touched that support three times so far. The next touch will likely be decisive. If the price falls below 100 the next likely support is around 95. We expect to see more selling as long-term investors cash in for the year-end. But if it doesn’t break decisively below 100, stand aside.
