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When Markets Are Quiet, Prepare Your Next Move

PERSPECTIVES: When markets are at their most uninteresting, like they are now, it can also be the best time to prepare for the next move

Michael van Dulken 17 August, 2012 | 7:00PM

I don't buy into the "But the markets aren’t doing anything" argument. Yes, August is traditionally a quiet month with many taking holidays and volumes falling in accordance. The VIX Index (US fear gauge)--which is based on the implied volatility (market expectations of stock market movement) of the US S&P 500 Index over the next month--has also fallen to pre-crisis levels, when markets were trending ever-higher, recovering from their tech bubble bust lows. However, lately markets have sneakily made multi-month highs. In some cases, they have made multi-year highs. Any pullbacks have also failed to undo much of the ground gained. So far, things look positive. 

The reasons behind this are two-fold. Markets are in a wait-and-see mode. Waiting for news on more monetary stimulus from major central banks to help reboot economic growth, and for the next move on a eurozone debt-crisis resolution as  politicians return from their summer breaks. This combo has kept downside risk limited. Bad macro news has maintained hopes of monetary stimulus. A sprinkling of good macro news has tried to negate this, but there hasn’t been enough to rule it out completely. Anyhow, good macro news is what we want anyway, so the net result is positive. 

On Europe, we've still to hear more about the European Central Bank's (ECB) pledge to do whatever it takes to help Spain/Italy. We've also to see if Spain throws in the towel, or if Greece gets to change its bailout rules again. Much to come, much to move the markets, much to please short-term CFD and Spread bet traders. 

Coming back to the market trend, technical analysis shows us that narrow trading ranges tend to see to a build-up of pressure while buyers and sellers are in such equilibrium. This tends to result in an explosive reaction. There is potential for current range to be the warm-up act for a significant rally or correction. This year it may be wise to stick around for the rest of August, ready to jump on board, rather than miss the start of the party, be it bullish or bearish. 

When markets are at their most uninteresting, trading sideways in extremely tight ranges, like they are now, it can also be the best time to prep for the next move: "I'll look at this if it gets to this level". Yes 'market' moves are limited. However, this doesn’t mean that all the shares of each index are not moving; look at some of the intraday moves we had this week on the FTSE 100

Standard Life (SL.) rose 9.7 %, regaining 4-year highs after its first-half results beat expectations, pleasing traders who'd seen it rally almost 40% from May lows.

United Utilities (UU.) shares benefited from bid speculation, sending them up 18% at one point.

Petrofac (PFC) fell 6.6% after results beat expectations but management's outlook was disappointing.

Standard Chartered (STAN) climbed 5% after settling with US authorities on allegations of facilitating illegal transfers of Iranian money.

Eurasian Natural Resources (ENRC) fell by 10.7% after first-half results showed a drop in profits due to lower commodity prices. 

Next week, we have several big UK names, including mining giants BHP Billiton (BLT) and Kazakhmys (KAZ) and Oil explorers Afren (AFR) and Premier Oil (PMO), reporting first-half results. This means we have potential to see intraday moves of the likes mentioned above if they beat/miss consensus expectations and depending on how the market interprets guidance for the rest of the year. And if corporate news fails to provide the stock moves you're after, there is plenty of macro-economic data to give equity indices, commodities and FX direction. 

As the lottery sayings go "all our winners are players" and "you've got to be in it, to win it". 

Good luck and have a great weekend.

This  is a "Perspectives" feature, one of a series of articles written by third-party contributors. The views contained herein are those of the author(s) and not necessarily those of Morningstar. If you are interested in Morningstar featuring your content on our website, please email submissions to UKEditorial@morningstar.com. 

Accendo Markets does not have a rating or target price on any of the stocks mentioned.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article
Security NamePriceChange (%)Morningstar
Rating
Afren PLC  -
BHP Billiton PLC1,204.00 GBX-0.21
Kazakhmys PLC468.20 GBX0.91-
Petrofac Ltd850.50 GBX0.53
Premier Oil PLC62.25 GBX-1.19-
Standard Chartered PLC765.20 GBX5.10
Standard Life PLC364.35 GBX-1.23-
United Utilities Group PLC976.50 GBX-0.26
About Author

Michael van Dulken  is head of research at Accendo Markets, an online trading services provider offering CFDs, spread betting and forex to retail (private) clients.