The market certainly feels very different in September, 2011 than it did this time last year. A year ago we were on a climb to higher prices (to what was to become a double top pattern earlier this year) with optimism in many markets and the concerns of the GFC well behind us. This is why it’s so important to study history - the concerns of 2011 are much the same for the credit markets as they were in 2008. Bond markets are trading at record prices and reduced yields and the insurance being paid on debt (especially European debt) is frightening, especially for the insurance companies that may have to pay out in the case of default.
Difficult times lie ahead but these are not new - the new paradigm is actually a very old one. Markets cannot run hard forever, despite the decade since the 2001 WTC attacks teaching people that normal market returns are double digits plus dividends. The true student of the long-term knows that average markets returns are not much better than cash interest, but if you are there for the good times, the markets outperform cash significantly. The problem is, markets can underperform or move sideways for years and that’s where we find ourselves – in a volatile market with a sideways bias. Interest in the markets is waning and people may walk away from investing out of sheer frustration.
The economic health of markets is a concern with high debt and other structural challenges. This will take years to resolve, not months, and a less reliable return is likely for ‘buy and hold’ investors than in recent years. That said, the volatile market is the friend of the trader and the potentially challenging times ahead don’t have to be a drain on your patience if your skills enable you to profit from these moves. I have been trading for more than a decade and can categorically say there has never been a better time to skill-up for the coming markets. With the rise of retail currency trading, commodities flying all over the place and an equities market that will always have a place in world, why wouldn’t you want a piece of it?
Deciding to be involved is the easy part. But it will be harder to get on top and it will certainly take more than the five-minutes a day it says in the brochure J . It will also take persistence, some calculated risk-taking and lots of donkey-work. These things are hardly glamorous but they underpin the trading success many of you have enjoyed to date. I have launched into this diatribe because I see more and more media proclaiming victim status for its readers. There’s no shortage of people ready to tell you the world is coming to an end. But maybe, for the astute, it’s just starting. You’ll have to deal with more and more noise too, as the world provides its opinions on your financial outcomes. My concern is that you might actually listen to it and get distracted.
Let’s be clear about the road ahead - the next few months could be okay or they could be awful. The actual outcome is secondary to how you react to it: it’s your choice whether you (and your money) stand up or fall down. Now is a good time to start asking the ‘if’ questions: How will you prosper if markets rally by 50%? Or decline by 50%?
Chart 1 shows the SPI 200 and I can suggest a few places to watch. The all-time-high of 6,880 may as well be part of the ancient history curriculum as this level is safely out of reach in the short- to medium-term. The big upside resistance is still the 5,000-level and could form a triple top when it next moves north.
The 3,722-level is the spike low from August 9 this year. From a technical perspective, this level is quite strong and we could expect a retest of this, potentially in September. If this holds we may get a bounce and some more sideways moves.
If the 3,722-level folds, then a retest of the 3,111 lows of the GFC is on the cards and this could be a perfect place for a potential double bottom.
Chart 1 – Monthly Bar Chart SPI 200
click chart to enlarge
Could we really head that low? Of course we could – it’s only 600-points from the August low but it may not be straight down so we can expect a choppy ride.
Reading back over this piece I don’t see too much good news for the masses and I hope you’re different and not part of the masses. But I am excited that markets can move this way (and in myriad other ways). Having the knowledge to participate makes the stress of the unknown a lot more manageable.