Binary bets of the week: Slipping Back Into Easy Street and Euro not out of the woods yet

by Dave Evans of binary.com

Slipping Back Into Easy Street

Well that didn’t last too long did it?

After a relatively short period of turbulence, markets appear to be slipping back into easy street, with the S&P 500 enjoying a rapid advance from the lows. Vague talk of the Fed holding off its tapering activities may have helped the bounce, but more significantly, US company earnings have come in on the positive side led by tech behemoth Apple.

S&P 500 Daily Chart:

Before we pile back into markets on the assumption that the good times are here again, it’s worth referring to Goldman Sach’s recent summary of the stock market. Their findings are certainly eye opening. Here are some of the highlights:

• Since the low in the global equity market on March 9, 2009, the MSCI World index has risen roughly 180% in total return terms, generating an annualised return of a remarkable 20%.
• 2013 was one of the strongest years on record for the equity markets. The US managed a price return of 30% and the Sharpe Ratio of the S&P 500 ranked in the 98th percentile since 1962.
• Despite the ongoing European crisis and economic stagnation, the Europe Stoxx 600, for example, has managed a 14% annualised return since its relative trough in 2012. In Spain and Italy, it has been 22% and 17%, respectively.

These statistics certainly put the recent market wobble into perspective, especially the short term panic as the market went backwards for a period – something it just hasn’t done since 2012.

Goldman put forward a ‘Great Moderation’ scenario in which the stock market bull market continues, but with much lower returns. Their second scenario is a bursting of the bond market bubble, triggering a bear market in both bonds and equities.

Which is more likely?

Stock markets are still pricey by historical standards when measured by various valuation metrics, there does seem to be an air of confidence that the Fed won’t let a collapse happen on their watch again. It took just a few weeks of selling for one Fed spokesman to at least dangle the carrot of halting the tapering of their easing activities. This alone could provide a floor for markets in the short term.

So while markets may not keep roaring higher, the downside could be limited too. 

A good way to play this is an IN/ OUT trade predicting that the S&P 500 will close between a high of 1990 and a low of 1850 in 45 days time for a potential return of 115%. Or put another way, betting that the S&P 500 will be between 1990 and 1850 at the close on the 8th of December could return £21.50 for every £10 put at risk.

Euro not out of the woods yet

The euro enjoyed a solid if unspectacular week, helped by strong PMI reports out of Germany and the Eurozone. The region is clearly not out of the woods yet though, with Italy continuing to cause concern.

EUR/ USD Daily Chart:

While the euro remains fragile, the dollar index has shown its Teflon qualities in bouncing back quickly this week. The Greenback is looking hard to beat again and this is a strong headwind for the euro to push on into. With upside limited, it could be a good time to reload on short side trades, especially as the chart above shows how the EUR/ USD has a habit of failing support line tests on the way down

Dollar Index Daily Chart:

A good  way to play this is a LOWER trade on the EUR/ USD predicting that it will close below 1.2600 in 10 days time could return 188% if successful. Or put another way, betting that the EUR/ USD will drop and close below 1.2600 on November 3rd could return £29.08 for every £10.00 put at risk.

Disclaimer: This financial market report is intended for educational and information purposes only. It should not be construed as investment or financial advice and you should not rely on any of its content to make or refrain from making any investment decisions. Binary.com accepts no liability whatsoever for any losses incurred by users in their trading. Fixed odds trading may incur losses as well as gains.