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.

Unfortunately I have not had much time to write the blog this week. The rally in the market whilst I have been away on holiday although welcome does present problems for short term trading. You would expect market rallies to present good opportunities, but with few signs of economic recovery any rally at the moment is built on very fragile foundations and could easily crumble away quickly turning positions into loss making situations. Conversely short positions in a market that is showing some signs of improvement are also heavily at risk in the current environment. Searching for a good trade this week was not easy, but we chose Imperial Tobacco on Tuesday which has underperformed the sector despite producing a bullish statement and the sector in general looking cheap. We always assess our downside risk and have our own internal estimates of where we feel the price could fall to in the very short term. With the shares under £16.30 on Tuesday the shares in our view had less than 3% downside risk with a good 1% plus upside .The call proved correct and we closed out the following day with a good 1% gain ungeared.

Choosing trades over the coming weeksn and months is going to be increasingly difficult as we still do not believe the foundations are in place for a sustainable rally. In addition, as 2010 starts to come into view there will be new concerns especially for the UK with a hike in the VAT rate due and a new Government which will undoubtedly make significant public spending cuts and tax hikes. At a time when any economic recovery will be in its infancy and very susceptible to any shocks there will be real risks for equities next year and the assumption of a return to growth and bull market conditions remains optimistic.

The CFD Trader is away on holiday until Monday 27th July.

The Week Ahead

Markets have had a poor week drifting lower in the absence of any major positive catalysts. The onset of the Q2 reporting season in the US is much anticipated and opinion remains divided as to whether this will result in fuel to drive markets higher or additional uncertainty over whether a real and sustainable recovery is under way.

We started last week with the ISM Non Manufacturing Index in the US which was broadly in line with market expectations at 47.0 in June compared to 44.0 in May. The service sector accounts for around 90% of the US economy. Whether the recovery in this index will continue is debatable, but at current levels it points to GDP growth hovering around the zero level which is a big improvement, but realistically this index needs to be closer to 60 if we are to see growth that actually creates a discernible recovery. Looking at the constituents of this index, the new orders level gained 4.2 points to 48.6 whilst the employment index improved by 4.4 points, but remains at a level consistent with ongoing large layoffs within the service sector. At the moment we can still only expect a very modest US economic recovery at best something which we believe will disappoint the market and expectations of a V shaped recovery will look increasingly wrong as we move into the autumn.

In the UK the Industrial Production figure for May showed a disappointing -0.5% drop compared to expectations of a 0.2% rise over the month. This left manufacturing output at its lowest level since 1992. It is difficult to see GDP having increased in the UK during Q2. The National Institute of Economic and Social Research produced its estimate for UK GDP growth in the 3 months to the end of June and this was -0.4%. They are generally quite accurate with their forecasts which suggests that the UK stagnated at best during Q2.

The other main news of the week was the announcement from the Bank of England of no change in policy with the interest rate held at 0.5% and no change to the quantitative easing plan with its £125bn asset purchase plan due to continue through to the end of July. After this the Bank can discontinue the asset purchase programme or continue for another month up to the level agreed with the Treasury of £150bn. It seems likely that they will eventually use all of the £150bn, but uncertainty remains as to whether QE will be extended any further and a great deal will depend upon what impact the current programme is having which at present is very difficult for the Bank of England to assess.

On Friday in the US the University of Michigan Consumer Sentiment number for June slipped from 70.8 to 64.6 in June, the lowest level since March. With unemployment still increasing at a rapid rate combined with falling house prices and increases in the price of gasoline sentiment has again been hit and this does demonstrate that any US economic recovery at this stage is built on very fragile foundations.

This week in the UK and Europe inflation will be the main headline grabber. Monday is quiet with no major news due to be announced, but on Tuesday we kick off with the UK CPI and RPI data for June. The CPI is expected to show a month on month increase of 0.2% bringing the year on year rate down to 1.8% which would bring the rate below the MPC’s target rate of 2%. The RPI is expected to fall to -1.6% year on year. Also on Tuesday the German ZEW economic sentiment survey is due to be announced and this is likely to show a further improvement in expectations with the consensus expecting the index to have risen to 47.8 from 44.8 the previous month. On Wednesday we get June CPI data for Italy and the second estimate for June CPI for the Eurozone which is unlikely to change from previous estimate of 0.1% month on month and an annual rate of 0%. Also on Wednesday we will see the publication of the UK unemployment figures for June with the claimant count expected to have increased by around 40,000. On Thursday we get the French CPI data for June and the Italian trade balance for May. Finally on Friday we get the Eurozone trade balance for May and construction output.
In the US this week we start with a quiet Monday and Tuesday brings retail sales data for June with the consensus anticipating a month on month improvement of 0.4. On the same day the Producer Price Index for June will be published with the consensus expecting a 0.8% month on month increase driven on by higher energy prices. Wednesday is the busiest day of the week in the economic calendar with the publication of the CPI data for June with the consensus expecting a 0.7% month on month increase with inflationary pressures coming from higher energy prices. We also get the Empire State Manufacturing index for July which is expected to improve from the level of -9.4 reported in June to -4.5 with more recent forward looking indicators presenting a case for improvement in this index. The Industrial Production data for June is also due to be reported with the consensus expecting a -0.6% month on month decline with production declines exacerbated by factory closures. Finally on Wednesday we get the minutes of the last FOMC interest rate meeting which will be in focus as market commentators look for an indication of where policy is heading and what the Fed’s latest growth forecasts are. Thursday brings the Philadelphia Fed Manufacturing survey for July which according to the consensus is expected to have deteriorated slightly to -5 from the previous level of -2.2 which would still leave the manufacturing sector in a state of contraction. Friday is very quiet in the US with just the housing starts data for June which is expected to have remained static at around an annualised rate of 530,000 units.

Please note that due to my annual vacation there will be no key economic data published on the 20th July. I am away from the 14th July through to the 27th July.

A week in which we have been focusing on the tobacco stocks for our next trade, but they have not moved back enough to provide sufficient room for a trade. We are always asked by clients why we don't trade more often than than the usual 5-10 times per month and the easy answer is that there are not that many very good trades out there where stocks have moved to a level where there is a buying opportunity at a time when other elements are also in place. We often buy and sell stocks only to see them return to a similar level of the previous purchase, but more often than not we won't buy again purely because the market is not moving as we would want. Short term trading consistently and successfully requires a huge amount of discipline. It is easy to pick stocks on a daily basis that are at attractive levels, but if the other elements are not in place it may still not be the right time to trade. For my own CFD portfolio if I can generate a 3-5% gain in one month and only take 4 trades to do it I am quite happy. If you can do that each month the returns can be very attractive.

The market this week has drifted lower and at the moment it is difficult to see what the catalyst will be to move the market higher at least in the very short term. Clearly the reporting season in the US will be very important, but I find it hard to believe we are going to see results that will drive the market higher. I think we will have to wait until October and the Q3 GDP figures for the major economies before we can think about the FTSE100 making a strong push through the 4500 level. Some respected data this week made an early estimate of a -0.4% decline in Q2 GDP for the UK which is not unexpected although a lot of commentators have been suggesting a positive figure. I believe we are in for a long hard slog back to trend growth and the strong recovery in world equity markets from earlier in the year will be very hard to build on in the short term.

Yesterday we managed a quick trade in Imperial Tobacco which is the first time we have traded this stock. Both BAT and Imperial have been range bound for some time and we have focused on BAT for our trades in this sector, but on Friday both stocks were outperforming and when the market opened in negative territory Monday morning it brought Imperial back to a level where it was clear a trade was available. We took only 1% out of it ungeared, but they all add up over the course of a month.

Week Ahead

Something of a roller coaster ride for equity markets last week which ultimately resulted in markets going nowhere. There was not a great deal of economic data to digest, but what there was did create volatility in both directions. We started the week with the announcement of the final estimate for Q1 UK GDP which came in considerably worse than what most were expecting. Growth was revised down from -1.9% to -2.4%. This was primarily due to a larger drop in construction output than initially estimated. The second quarter should be a good deal better, but is still likely to show a negative figure with the possibility of modest growth during the second half of the year.

The European Central Bank announced their interest rate decision last week and as expected there was no change from the current level of 1%. Jean Claude Trichet stated that he does not rule out a further reduction to the interest rate although it seems likely that they will hold fire until they can see what impact the current rate and the stimulus measures are having. We suspect that there will be no change in policy this year.

The US as always provided the big market moving news of the week. First up was Consumer Confidence for June which fell to 49.3 from 54.8 in May. The expectations component of the index fell by 6 points whilst inflation expectations increased. Also expectations for future employment and income growth deteriorated. After the initial burst of enthusiasm following the stock market rebound this is the first drop in this index since March, but it is not unexpected to see some consolidation in this index at this stage of the economic cycle.

The US Institute for Supply Management data for June rose for its 6 consecutive month to 44.8 from the May level of 42.8. Anything below 50 is consistent with contraction in the manufacturing sector, and the next month or so will be critical. A break in the trend with a move back towards the 40 level will not be taken well by the market. Looking at the individual constituents of this index, the production index rose to 52.5 which is the first time it has been above 50 since August of last year. The new orders component fell back to 49.2 from 51.1 in May, but remains within striking distance of 50. Overall, it is good to see this index improving, but we cannot escape the fact that the US manufacturing sector continues to contract.
Unemployment was the big news of the week. We started on Wednesday with the ADP Private Payrolls which came in with a decline in the number employed of -473,000 in June compared to expectations of -395,000. This led us into the Non Farm Payrolls on Thursday where expectations were running high that the decline would be less than 400,000 jobs lost especially after the much better than expected decline May of -345,000. However, the market was disappointed to learn that employment fell by 467,000 in June with job losses across the board in the government and private sector. On the plus side the unemployment rate ticked up to 9.5% against previous estimates of an increase to 9.6%.

In the US this week we start on Monday with what is likely to be the most significant data of the week with the publication of the US Non Manufacturing ISM data for June. The May index came out at 44.0 with the consensus anticipating a figure of 46.7. On Wednesday in the US we get consumer credit data for May whilst the usual initial jobless gains are due to be announced on Thursday. Friday in the US brings us the University of Michigan Consumer Confidence data.
In Europe the week starts relatively quietly with no major news due to be announced on Monday. On Tuesday we get UK Industrial/Manufacturing Production for May which is expected to show a modest month on month improvement although this is unlikely to have any impact on the market. On the same day we will also see the publication of German factory orders for May and the French trade balance for May. Also on Tuesday we get the UK Nationwide consumer confidence data for June. On Wednesday the final estimate for Euro zone Q1 GDP will be announced which is expected to remain at -2.5% quarter on quarter. It will be interesting to see if the figure is worse than anticipated following the significant downward revision to the equivalent UK figure last week. Also on Wednesday the German Industrial Production data for May will be published. On Thursday we get the Bank of England interest rate decision which will result in no change to the current rate of 0.5% and the main focus of attention will be whether they extend the quantitative easing programme. Finally, on Friday in the UK we get Producer Price Index Input and Output data for June. Both sets of data are expected to show a modest increase.

This week we will be updating our note on Marks and Spencer and we will be commencing coverage of Imperial Tobacco.