I’m not sure about you, but nothing irritates me more than the doomsayers that jump on the bandwagon or pretty much any negative World event and use it as confirmation that the World economy is about to implode.
The Brexit referendum (remember, a couple of weeks ago?) leaves the UK with a big question mark over its future – compounded by very weak leadership, but has had little impact on the overall equity markets and in particular, those in the US.
The US has pushed up almost 5% from the late June low, hardly crumbling to 6000 points as predicted by some! In fact, even the Aussie market has managed to creep up, despite the post Australian election paralysis.
And this leads me to my two points for this article.
Firstly, after more than 2 decades of professional trading, I am very comfortable with the fact that I gave up on trying to predict and forecast, let me see now – yep more than 2 decades ago! You see, to make money, you need to respond to what is going on, not write a forecast, which at the end of the day is probably 50/50 at best!
One of our views was that, irrespective of the Brexit vote, the Volatility Index (known as the VIX) would be higher than the 16 points it was sitting at, going into the vote, simply as a result of uncertainty. That means instead of trying to pick heads or tails, the reality is, volatility would naturally increase.
Secondly, the whole psychology of the stock market is based on an underlying optimism. And once again, the Optimists won out. Set backs happen and then markets recover.
Don’t get me wrong, Brexit is not off the radar, in fact I think there is far more to come along, down the track. But the here and now is that markets have recovered and moved higher, which is typical in the pattern we are currently seeing, which is headline to headline trading.
Headline to headline?
Markets have been pressed into a fairly tight 5% or so trading range for the past while. Expectations of a Fed cut in rates and the looming US election, being two of the major factors in keeping things boxed in. As a result, the noise of Brexit, is just that, noise, at least until the decision to follow through is implemented. With an earnings season just around the corner in the US, and the bigger Fed Rate Cut and Election issues still in the mix, there will need to be a more significant event to cause more damage than the “Post Brexit Shockwave”.
A weak reporting season would be an example of this and after the previous quarter’s mixed bag, some strong signs will be sought out from the latest numbers.
One thing that does pose a risk and, irrespective of political persuasion, is political leadership. Markets hate uncertainty. Strong leadership provides a beacon of light and something firm, to which colours can be tied.
Lack of leadership exacerbates uncertainty.
Looking at the Soap Opera of UK politics, right now, where nobody wants the job, or closer to home, where some frustrated voting has resulting in almost everyone being a “potential” for the job, or indeed, in the US, where the lesser of the two Evils will get the job, its not good!
The forecasters will love this – it gives more credibility to the theory that markets are about to hit the skids. The reality is, they aren’t, not this week and the more they cry Wolf, the less people will listen!
We will have a choppy earnings season that will provide great opportunity to buy into the next move, one that I will be fully participating in. One thing to really understand about the Bull and that is to make sure you have your hand on the controls. Opportunity will be there for those game, but if you are in the game, make sure you are nimble and on top of what your plan is.