Wednesday, October 29, 2008

Bears Sent Running In Markets Rally

Was yesterday the bear killer day? It certainly looked like that in the last hours trading of the Dow and the FTSE held its own too.

The Dow rose 880 points and the FTSE was up 200 points. On the face of it looked like a huge rally even as consumer confidence figures sagged in the US. The story coming from traders, however, was that the rally was caused by a lack of sellers than a surge in buyers so it would be premature to say that this is the end of the fall in prices.

David Buik of BGC Partners described the movement in the markets as “madness”.

“What happened yesterday, in my opinion, is that we had no redemptions, no hedge fund selling in New York, and there was also talk of interest rates cuts in Japan. It was a hysterical rally based on nothing

“I would be immensely cynical about this. We are going to see very volatile times. We have to remember that the only asset that is liquid at the moment is equities. If you can't sell your property, borrow money or sell commercial paper, what can you do –- you can just sell equities. That’s why we’ve seen these equities crash below sensible levels of valuation. It will take time to iron out."

The US Fed today is expected to cut rates and many are saying that yesterday's rally was pricing in this cut.

The Euro bourses were skewed by the German Dax's embarrassingly bad handling of the Volkswagen affair. The situation was caused by huge shorting of VW which was seen as being overvalued because of Porsche buying stocks at bargain levels. When the market realised that there was not much float of shares for shorters to cover a scramble for shares sent VW shares to ridiculously high levels.

To give you an idea VW was valued at $102bn at one stage. To justify these numbers they would have to sell 64 million cars per year. Considering that sales of cars in the world are just north of 40mn you can see how silly the valuation became.

The Dax has received huge criticism around the world and the whole debacle could cost German investors billions, it s also expected to bring down a number of hedge funds who will have sustained huge losses.

Unconfirmed rumours in the US that Goldman Sachs had exposure to the farce caused the shares of Goldman to dip significantly although much of these losses were retraced in yesterdays rally.

As for today's trading all eyes are on the Fed announcement at 18.15 GMT but anything other than a complete surprise of a higher rate cut or no rate cut is unlikely to massively affect the market.

The thing to watch for those trading the indices is how this rally holds up. If this was just a bear rally it could fizzle out fairly quickly, if we see more strength today then we could be seeing a bottom forming.

Volatility is a risky business, of course, so be careful. 5 CFD contracts on the Dow at its lows yesterday would have yielded about £20,000, tasty profits but if you had been the wrong way you would have a lot of explaining to do to your bank manager.

Our mantra at the moment is 'Stops and Limits'. By all means take a dip in the market but make sure you are protected on the downside as if you get this market wrong it will bite your arm off.

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