Warning: Bears Ahead

Financial markets have a great habit of giving a false sense of calm, sucking in new investors only to sell off once more and that’s exactly what’s going on right now with the major financial indices. Since the March low, markets have seen a very nice bounce in the major indices,however, that’s all it was, a bear market rally where the down trend remains intact.

The S&P500 is still one of the world’s most watched indices, what happens in the S&P500 often dictates the FTSE100, German DAX, European Markets and the Far East markets. The S&P500 is also the benchmark that most funds are compared against. I like to look at a monthly chart of the S&P500 which gives a long term prospective. By adding a 20 month EMA (exponential moving average) we can gauge if the bulls or bears are in control. As you can see we broke below the EMA back in January, then we had a move back up to the 1400 level. Whilst it is possible that this index climbs a little more and we could have a few more weeks of a rally or sideways action, this is a time bomb ready to explode. Have a look back at 2001 when the same happened, everything to me points to another leg down between now and the end of September which could take us to the 1260 level.

This could be a summer that most investors may wish to sell up and go away. For short trades this should be a glorious time and I have been increasing my short trades on the FTSE250. You can go short the FTSE250 for September via a spread betting company, you can also look at buying PUT covered warrants or a listed CFD. Whilst I also think the FTSE100 will be weak over the same period, I think that you’ll get more bang for your buck shorting the FTSE250. The FTSE250 has been in a range between 10,600 and 9,400, however, this pause is going to end and the next break is down. How low can we go? From the current 10,000 level I can easily see a break down to 8,500. Of course nothing falls in a straight line and you should expect a few sharp up days, but I urge you not to be shaken out. Covered Warrants could be a good way to trade as you don’t have to worry about stops.

Take a look at SQ30 which is a 10,000 FTSE250 Put for December 2008 The reason I am so bearish on the FTSE250 is that many of the companies listed in this index are very focused on the UK economy and don’t have the international exposure that many of the FTSE100 shares have. The FTSE250 gives you a much truer barometer of what’s going on in the UK. Shares listed in the FSTSE250 include Barrett Developments (BDEV), Rightmove (RMV), Bellway (BWY), Bradford & Bingley (BB.) and Berkeley Group (BKG) all of which are giving screaming sell signals. Of course, we do have a few FTSE250 companies showing strength one being Ferroexpo (FXPO) however this company should be moving to the FTSE100 very soon. On the whole the FTSE250 mid cap index has little going for it. At some stage when valuations are so beaten up this will become a buy and you should also expect takeover and merger activity to pick up in the FTSE250 but that’s a way off yet. The only bullish point for the FTSE250 is if Crude Oil prices can get back to below $100 then this would be a positive and would certainly help Easyjet and Ryanair both listed in the FTSE250.

It would also help some of the FTSE250 companies that rely on consumer spending. The Index that looks the strongest is the NASDAQ 100. Technology shares are holding up very well, however, if we do get a large summer sell off, Tech shares will find it hard to carry on moving up, so I would not say it’s a safe haven. Chart: All my work now shows we are ready for the next down leg with FTSE250 and the S&P500 looking extremely weak. The last time we saw this pattern was 2001 and odds are in favour of another large down move.

Vince Stanzione has produced a home study course to teach private investors how to benefit from trading financial Spread Bets and Fixed Odds priced at £347. For more information please visit www.fintrader.net or telephone 01189 47 66 30 (24hrs)