Binary bet of the week: Record Highs Abound – But Are Markets Complacent?

By Dave Evans of Binary.com

Despite respected publications such as Der Spiegel warning that the situation in Ukraine could potentially be more dangerous than during the cold war, world stock markets are setting new record highs.

So are markets too complacent, or have we really never had it so good?

On Friday, the S&P 500 hit a new intraday high of 2094.6, while the tech heavy Nasdaq 100 is within range of its tech bubble highs – a level many thought to be consigned to history, along with Pets.com.

S&P 500 Daily Chart:

The highs rally isn’t just a US phenomenon either, with the German Dax also hitting fresh intraday highs.

Dax30 Daily Chart:

The cross continental nature of the current boom is significant as there a many global concerns that could be dragging markets lower right now.

The Greek debt stand off has the potential to rip the Eurozone apart, the situation in Ukraine could escalate to a new cold war and the removal of US quantitative easing could unsettle stock markets grown used to a ready supply of cheap credit.

It is said that bull markets climb a wall of worry, but this is only partly true.

The fact is that there is always something that financial markets could worry about. More often than not, a bear market is attributed to some negative news in retrospect as market traders look to explain the crisis in some meaningful way. This isn’t to say that there aren’t genuine concerns for the markets right now, or that the credit boom wasn’t an accident waiting to happen – but to say that markets always respond as expected during geopolitical worries would be a mistake.

Markets are often anthropomorphised into bulls and bears, but more accurate comparison would be something akin to a meerkat. Markets are flighty and prone to group panic at the slightest provocation, yet at other times can appear too calm.

As well as the geopolitical risk factors, there is the fact that the S&P 500 valuation is rich by historical standards. The S&P 500’s trailing 10 year PE ratio is still at elevated levels not seen since the tech crisis, implying a heavily overbought market.

Yet, similar to the geopolitical risk, just because markets are expensive, it does not mean a reversal is imminent. Timing the top in this situation is nigh on impossible. What is more predictable is to say that the size and duration of the pullback when it comes will be significant.

So, ultimately yes – there are some huge risk factors across the world and stock markets are expensive by historical standards, but until we see some sort of sustained pullback it may be better to ride the trend. Throughout the rally, the 100 and 200 period moving average have acted as reliable support levels for the S&P 500 and until these are breached, it could be to keep betting on the rally.

A good way to play this is a HIGHER trade predicting that the S&P 500 will close higher than 2,150 in 45 days for a potential return of 217%. Or put another way, betting that the S&P 500 will close above 2,150 on the 30th of March 2015 could return £21.66 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.