The market is really struggling to make headway at the moment and is looking for the next big catalyst to move it up or indeed down. After such a big rally consolidation is inevitable and I can't help but feel that some form of correction is likely to happen soon.

Fron a trading perspective it makes life very difficult indeed. I have traded in Scottish and Southern Energy a couple of times this week with it moving between £11 and £11.15. However, there is an attached risk as Moodys are expected to announce their review of the company's credit rating with the real possibility of a one notch downgrade. I don't expect this to have a material impact on the shares but it may well create some short term negative sentiment which could result in some short term weakness. Scottish and Southern has hardly participated in the recent rally and I think there is a fair amount of downside protection if the market does sell off.

After the strength in the market last week it has become very difficult to find good trades. In one respect we do not want to be left behind if the market does continue to rally but on the other hand it is clear from most of the economic data that whilst a recovery may be on the cards it is not clear that it will be sustainable or at a level that is consistent with an ongoing equity market recovery. The key to any trade at the moment is to give some scope for upside if the market does continue to rally but also limit the downside risk if sentiment turns against us. We are kicking ourselves for selling out of Centrica far too early last week, but as always our strategy in short term trading is primarily to lock in short term profits. If the market recovery starts to look sustainable we may start to run profits for longer, but for now there is a considerable degree of uncertainty and we will remain very cautious for the time being having bagged very good profits so far this year.

The market seems to have quickly overcome the blip at the end of last week which carried on into Monday's trading and we are now back where we started. From a trading perspective it means yet again that prices stand at levels where it is difficult to find a suitable entry point without increasing the potential for downside risk. The weekly initial jobless claims announced in the US today were not particularly good and we could easily see the August Non Farm Payroll figure showing a greater decline than July. Nevertheless the market seems to have accepted that unemployment in the US is going to continue rising for several more months. The Philadelphia Fed manufacturing index rose into positive territory today for the first time this year. It does suggest expansion in the general manufacturing sector, but we would need to see an improvement on the figure of 4.2 registered for July next month to believe that a sustained recovery in manufacturing is in the offing.

It does look as if the current positive sentiment combined with low holiday volumes will push the market higher in the very short term, but there is simply not enough evidence of a sustainable and good recovery to justify much more and I can't help but feel that the situation will deteriorate once we enter September. Good two way volatility is far better for trading than a market that persists in riding higher especially when the fundamentals do not justify it.

A quick this trade this week in what is a new stock within our preferred trading stocks. We bought some Centrica on Monday and sold out for a modest 1% gain today. Short term the market is likely to be range bound which hopefully will provide better trading opportunities over the coming weeks.

Week Ahead

The last few weeks have shown an improving economic situation which the market has responded to. The recent rise in the FTSE100 from around the 4120 level in mid July to around 4715 at the end of last week has been sharp with most of the major cyclical areas and the financials making the running. Most of the major brokers have become quite bullish and whilst some have mentioned the possibility of a breather before the next upward movement most certainly expect the recent rally to continue, driven on by an improving macroeconomic picture especially in the US and a real expectation of a return to growth. There is no disputing the improvement in the world economic situation although it was surprising to see the announcement last week that both France and Germany have delivered growth during the second quarter. However, we remain unconvinced that the recent rally is sustainable and we are increasingly of the view that the world may face a double dip recession with an improvement in the economic situation later this year and during early 2010 to be followed by a slip back to recessionary conditions in late 2010.

In the past couple of weeks the notable data has to be the Non Farm Payrolls in the US that showed a fall of -274000 in the number employed during July, the lowest drop for several months. This was taken well, but on the other side of the coin the ISM Non Manufacturing Index fell to 46.4 in July from the previous level of 47.0 in June. A figure below 50 indicates contraction and the consensus at the time expected a further improvement. Given that services represent around 90% of the US economy we are still some way off real growth. There was further evidence on Friday of last week of just how fragile any US economic recovery will be with the second monthly drop in a row in the US consumer sentiment index which is back down to levels it was at in March of this year. In addition on Friday the US CPI data demonstrated the real risk that the US is moving closer to deflation with annual inflation dropping to -2.1% from -1.4% whilst annual core inflation (excluding food and energy) fell to 1.5% from 1.7%. We consider a prolonged period of deflation in the US to be the real risk to the world economic recovery and equity markets in late 2009 and 2010.

The coming week is relatively quiet in terms of economic announcements. Starting with the US on Monday we have the Empire State Manufacturing index data for August. This will be in focus as the consensus is expecting an index reading of 5 for August which would be the first indication of growth this year. Another negative reading may well impact on the market. On Tuesday we get Housing Starts data for July which is expected to show a modest increase in the annualised rate to just over 600,000 units from the 582,000 registered for June. The Producer Price Index for July is also due on Tuesday and is likely to show a month on month rate of -0.3% due to lower energy, car and truck prices. On Thursday the Philadelphia Fed Manufacturing survey will be published for August and whilst the consensus is expecting a reading of -1.0 it will be interesting to see if a positive figure is published which would indicate expansion for the first time in many months. Finally on Friday we get further news on the state of the US housing market with existing homes sales data for July which are expected to show a moderate improvement on the 4.89m annualised rate reported last month.

Turning to Europe, on Tuesday in the UK we get CPI data for July which is expected to show a month on month decrease of -0.3% with the annualised rate falling to 1.6% from the 1.8% posted last month. The ZEW Euro zone and German economic sentiment index for August is expected on the same day and is expected to show further improvement especially given the reported upturn in German Q2 growth last week. On Wednesday we get the Bank of England minutes from the last meeting and the focus will again be on any comments about quantitative easing. Thursday brings UK retail sales figures for July which according to the consensus is expected to show a 0.4% month on month improvement. Finally, we get the August Euro zone purchasing managers index for both services and manufacturing on Friday.

This week we will be updating our note on Vodafone.

There is always a natural assumption made that when markets keep going up there is easy money to be made, but I always take a somewhat different view as an active trader. Primarily you need to know why the market is raging ahead and whether it is sustainable. At the moment most major brokers are talking in terms of the next bull market and v shaped recovery. I find it difficult to buy this argument but undoubtedly at the moment we are seeing a lot of cash which has been waiting on the sidelines rushing in so as not to miss out on the next leg up. This can be self fulfilling and for that reason it is quite possible that the current rally has the momentum to go further perhaps all the way to the 5000 level, but I fear that it will not last. I for one remain cautious and my greatest concern lies with the US and in particular the US consumer who remains very indebted and once the government fiscal stimulus package ebbs away it will reveal a consumer that is in no mood to spend or be in a position to take on more debt. US consumption is heavily tied to GDP and I believe that at best we will see very modest growth over the next few years as consumers rebuild their own balance sheets. It was interesting today to see that US retail sales declined in July albeit only by a modest -0.1%, but the market was anticipating a positive figure and now almost expects every bit of economic data to surprise on the upside. There may be more negative surprises over the coming weeks but I suspect for the time being Mr Market will take them in his stride and keep going, but for how much longer is questionable.

Trades this week have been few and far between. I have traded in my personal cfd account Imperial Tobacco at much higher levels than I would normally consider, but with the weight of sentiment clearly in favour of this sector I felt it a risk worth taking and I have been rewarded. It is always difficult to rationalise buying a stock at a much higher level than the price you sold it for a week earlier, but sometimes if the stock is clearly in favour it can work to your advantage although you should always be assessing the downside risk.

Market conditions remain very difficult for short term trading given that the market is at levels where a sell off could easily take place. There is no doubt the economic picture is showing some signs of improvement especially in the US, but we are still a long way off real economic and more importantly sustainable economic growth. Whether this expectation is already priced into the market is difficult to tell. To get the probability of success with short term trading does not just require a stock hitting an appropriate entry target, but it also needs other factors to be in place such as the position of the market and other market moving factors such as economic or company related news. We always err on the side of caution and will wait for the right conditions even if it means having to sit on the sidelines. Most traders that decide to day trade come unstuck and patience can certainly reap rewards although even then there is no guarantee of instant success, but at least you can start off with the odds on your side.

This week we will be focusing on a couple of the more defensive stocks yet again for our next trade. It limits the downside in the event of the market falling back and if we time it well it should deliver an ungeared gain of 1%-2% in a matter of days.

A poor Non Manufacturing ISM index today for July which came in at 46.4 against consensus expectations of around 48 and more importantly the previous month's figure of 47.0. This is certainly not good news and whilst it is not a significant drop back, the index is still at a level consistent with contraction in what makes up around 90% of the US economy. I would consider the data today as far more important than the Non Farm Payrolls which are due on Friday and where it is clear that significant job losses will be continuing.

We did what I fondly call one of our elastic band trades today and yet again in the same stock as before namely Imperial Tobacco. Sometimes trends in stocks are very clear and the tobacco stocks have finally rallied along with the market to new levels on the back of promising results and the market generally starting to favour the sector more now that the cyclicals have rallied to levels where there is no longer clear value. Yesterday BAT was downgraded to neutral from buy by one broker which had the effect of not only taking BAT lower but also Imperial. The downgrade was not from a heavy weight broker and after a good rally it seemed as if some of the short traders and those with long profits took advantage of the downgrade to sell out and book some profits. In these circumstances when the weight of buying power is still very much in favour of a sector and a stock there can be good opportunities to pick up a stock that has suffered a short term blip and book a quick profit. Last night we looked at Imperial following the 40n point decline in the share price and looked at the potential downside and the potential upside in the light of the recent share price momentum the shares have had. The market had already worked to our advantage in that the shares had fallen on a day when the market was strong which increased the likelihood of the market opening down first thing in the morning which increased the possibility of a further more modest downward movement in the shares prior to an expected bounce. We managed to guess bang on with a move down to 16.59 and closed out a little while later at £16.85for a 1.4% ungeared gain after costs. It all adds up and a few more trades like that over the course of a month will provide a very respectable gain.

Another difficult week ahead with the market in a position where it is very difficult to predict where it may move next. We have the banks reporting season upon us which in general is likely to demonstrate that the worst is over, but we already know that and it is more a case of whether the market will continue to respond to this. Most of our monitored stocks are now sitting in ranges where it is very hard to predict where the next move will be and timing of trades is more reliant on the performance of the general market. The one area which has still not responded are the utility stocks and here the stocks that are of most interest to us are National Grid and Scottish and Southern Energy both of which have recently issued satisfactory trading statements but at present the market isn't very interested and continues to focus on the banks and the mining stocks. If the market rally continues there will be greater focus on value stocks and I would expect to see a better performance from some of these stocks eventually.

In the US this week we have the busiest week for economic announcements with both sets of ISM data (Manufacturing today and Non Manufacturing on Wednesday) and the Non Farm Payrolls on Friday. The market has high expectations for all 3 sets of data which will need to show a good improvement on the previous month. The Non Manufacturing ISM due on Wednesday will be particularly important, the previous level was 47.0 with the market consensus anticipating 48.2 for July. A drop back at this stage would be taken very badly by the market.