By Zak Mir.
We try to keep our focus tight at Spreadbet Magazine. This means we avoid topics such as politics, unless there is a chance you can profit from our analysis.
It is true that we have our monthly column from David Cracknell in the magazine, but even then his pieces are in the context of trading. As former business editor of the Sunday Times and someone who regularly punts on the market, he is well placed to assess the latest developments in Westminster and their likely impact on financial markets.
And I’m sure, this morning, he is wondering what on earth Ed Miliband thinks he’s up to, after events this week.
As leader of the Labour party, there is a reasonable chance Mr Miliband will be our next Prime Minister. Labour is favourite at the bookmakers to win an outright majority at the next election. If UKIP splits the Tory vote, which I believe is likely, then this could well happen.
If this week is anything to go by, that does not bode well for UK PLC.
Even though we are still over 18 from an election, Mr Miliband has managed to wipe £1billion off the value of utilities companies this week, after his ill-judged comments, threatening to introduce a price freeze until 2017 as well as creating a new, stronger regulator.
However, the piece de la resistance, as far as I am concerned, is his threatened land grab from the home builders, with a “use it or lose it” bullying approach. Given how healthy this sector has been in the past 5 years, this was welcome news indeed!
Surely if the likes of Persimmon (PSN) or Barratt Developments (BDEV) could turn a profit in this horrible market, they would?
The media has rightly rounded on this proposed Zimbabwe-style appropriation policy for being a throwback to the unwelcome socialist rhetoric of the past. The presumption is that the public bashing of the utilities and homebuilders is just conference grandstanding and does not represent a serious view of Labour policy. I’m not so sure. I think there would have been more mileage in a “hate the rich/mansion tax” speech, but of course this is a Lib Dem policy!
Before I digress any further, let us move swiftly back to our primary focus (of making money!) and take a look at the daily chart of Severn Trent (SVT):
Judging by the price action, it appears the hanging sword of Damocles is having an effect. If Labour comes to power and pursues this nonsense, then the fundamentals for SVT change dramatically. The share price has already been slapped, after the company decided not to accept an offer in spring. This has led to a regrouping by the bulls.
The possibility now is that the bad news is priced in. If this is the case then we should see an accelerating recovery in the coming weeks, back towards the March price channel top of 1,950p. At this point only a weekly close back below the 200 day moving average at 1,724p would really be negative, particularly as we appear due for golden cross buy signals between the 10/20/50 and 200MAs over the next month. It is traditionally the case that the sweet spot for a stock or market’s recovery is in the 2-4 weeks ahead of a golden cross buy signal.
As far as the homebuilders are concerned, I mentioned Barratt Developments (BDEV) above as it is a key player in its sector:
Looking at a daily chart, this appears a little on the toppy side since May. At best this stock can be described as being in a holding pattern. That said, if the RSI is used as a leading indicator, it can be seen how the best levels for the oscillator really came from before April, well before the stock peaked in terms of price action. The implication is that while a July RSI resistance line towards 55 remains unbroken and there is no end of day close back above the 50MA at 325p then a retest of the 200MA is likely. This is currently at 284p. This might not mean the end of the mega rally of the last year, but it is a situation to remain aware of.