The absence of certainty and confidence is bearish for general market sentiment (FTSE MIB -3%), so the market is currently looking to Italy to provide this confidence which will allow Equity prices to rise once more.
The market is also currently focusing on short-term news so traders must be aware of this and also when this tendency comes to an end. When reacting to news the market is making it very difficult for traders to profit from their fundamental view. Often the market will move in a contrarian direction until such time as the herd begins to dismiss the validity of the original news and begins to reverse both their opinion and trades. Only once these “weaker” participants are out of their initial positions does the market subsequently resume its correct, fundamentally-driven direction. As a result, such price movements on the back of fundamental news are fading opportunities.
It is important when the market is trading in a nervous state to be patient. Currently, markets have a tendency to drive up and stop out weak shorts only to then drive down and squeeze out weak longs. Only after this do the markets make a more concerted move to new price areas. At the moment, the original price movement is often followed by a larger move in the opposite direction within any one trading day; referred to as an open – rejection – reversal. Referring back to the situation in Italy, over the near future it is important to look at the conditions of the yield curve and bear in mind that even though there is a reduced chance of Italy defaulting on their debt, the current situation in Italy is negative for the markets. Italy’s troubles have raised a big question mark over the strength of the Eurozone and whether there is a threat of a break-up. This was reflected today in an 5 bps increase in French Credit Default Swaps meaning the market is very aware of the likelihood of a domino effect occurring in the Eurozone.
The market will now focus on Italy and, as it did with Greece. This means that due to the current state of the Eurozone, the Euro currency is still a sell and a risk-on/risk-off type trade.
Trading Tip of the Week: When the market isn’t acting in line with your hypos you must let the market to do as it wishes and leave it well alone or be prepared to jump-in on the other side – either way, you mustn’t fight it!