Is the best strategy for this coming holiday season to close down and wait for Sep?

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And so, the third quarter has just started and investors are looking back trying to get some clues on what is going to happen before packing their bags and jumping on a plane to the next sunny beach with a calm and transparent water. Last year was frightening and no one wants to repeat the same errors.

When investors were expecting a calm and relaxing summer, August 2011 was one of the most volatile months in history. Looking at FTSE data for the last 20 years, last August was the fifth most volatile month over this period. Average true range, that gives a rough estimate of how many points on average an asset is moving, suddenly picked up from a range of 50-100 to more than 200 in August and the FTSE ended the month with a loss of 7.2%. On a single day, August 8, volatility picked up and the blue chip index moved inside a staggering 385 point range.

If the tsunami effects and MENA conflicts happening last year that created several drops in equities are no longer on the table, the main driver for the awful performance experienced in August is still there to daunt us all – euro zone problems. After some more summits, many speeches and discussions, an orderly default occurred in Greece, massive rises in bond yields in Spain and Italy are being experienced, a bail out for Spanish banks (and Cyprus), and two LTRO programs; time is now running out… The efforts from the ECB have been clearly insufficient and it seems there is no will to do much more. “Helicopter” Ben Bernanke has been supplying help from overseas with the promise of QE3 but all the measures are just like dropping glasses of water onto a gigantic fire.

No one knows for sure what the next episode will be in theever evolving euro zone saga but spread betters should prepare for a peaceful holiday instead of being busier than ever during this time. How can that be done? Well, the short answer is: close all your positions and come back in September. If that doesn’t fit you, you need to take a closer look at past performance to find ways of protecting your portfolio value and avoid a stressful summer. The following table portrays the performance by quarter for several asset classes.

The third quarter of last year was awful for almost every asset class with the exception of Gold and the Euro cross rates (short side). European indices lost around 25% in the quarter, with the Dax, the CAC and peripheral country indices doing very poorly. Going on holiday and returning with a reduction in your portfolio value of 25% is not pleasant to say the least and given the leveraged nature of spread betting, those poor performances would have been much amplified and certainly zeroed many traders’ accounts.

It is interesting to note that the loss in the FTSE was much milder, so was in US equities, almost half the loss in their European counterparts. Both FTSE and US indices have been doing much better, not only in crisis quarters but also in other periods. It seems that there is some firewall protection against the euro zone crisis and, probably, those markets are good alternatives to all those seeking to dump European equity holdings.

The Dax has been outperforming all other indices so far this year but it has also been much more volatile than any other and it is not a the place we would like to see our money when the market is going down. Spanish and Italian markets are certainly to avoid also.

In terms of currencies, there has been large drop in both EUR/USD and EUR/GBP. These pairs alsodropped massively in the third quarter of last year when equities similarly sold off and the same will no doubt happen again if the euro zone crisis worsens. Gold has been a good safe heaven, particularly due to the very low yields given by traditional safe assets. 

Put all this together and what do we conclude? It is certainly the brave amongst you that do not close positions before going on holiday, the best stance is to prepare for the worst in case history repeats itself once more. Gold is a must have in any portfolio, while crude is certainly to avoid at present, particularly now that China is cooling very quickly. Buying the FTSE and the US indices while selling some European counterparts may also be a sound strategy. This way, a spread better can build a pairs trading strategy, one that will cut on risk and be market neutral in some way.

Please remember that the best spread betting strategy for holidays is always to close everything and take some time off. If you insist in keeping your holdings, at least through reducing leverage you can manage riss and avoid potentially being caught for the second year in a row.

Filipe do Costa

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