Markets remain buoyant at the turn of the Year but certain sectors look ripe for a pullback

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When and where will the party end?

The New Year has seen big increases in stock prices amongst most major markets since the last minute fudge over the fiscal cliff in the US. It seems that the markets have become somewhat sanguine with regards to the shenanigans by US Politicians in their brinksmanship over all things economic and largely take things in their stride, with volatility back near recent year lows even as we hurtle towards the debt ceiling issue in a little over 8 weeks….

With the backdrop of continued QE in the US, there is a good feeling amongst investors at present it seems.  I posted some months back that despite the doomsayers, the FTSE should be trading at 6500 if it were to stick to its long-term trend from the 1980’s.

Markets though do not go up or down in straight lines and the last 3 years have seen early New Year bounces fade away as the largely bad macro news gathers pace. In the UK for example, the economy likely shrank again in the last quarter of 2013 and we could well tip into a technical recession yet again in this current quarter.

In the meantime, the rally could continue for a week or two yet.  Two of the sectors that are doing the best are Banks and Homebuilders. Indeed, Taylor Wimpey and the other homebuilders now stand at post recession highs as of Friday. The de-regulation of the planning laws has given these companies a boost, along with their strong organic results. The re-rating is to my mind, a little too high now though at approaching 100% in just a couple of months. I can’t see this being sustained when mortgages are still so hard to come by and the UK property market outside of London remains largely in the doldrums. As soon as the market turns there will be a big pullback here on such overbought stocks such as Taylor Wimpey and Barratt Developments. although short interest is currently declining as can be seen in the graph below for Taylor Wimpey, where shorts have been hit hard this past few months and probably explains a large part of the strength in these 2 stocks in particular

Taylor Wimpey Short interest

Taylor Wimpey & Barrat Dev’s 4 year chart

The second sector which is undergoing its traditional start of year boom is the Banking sector. Every year it seems, in the run up to their results, the bank’s share prices increase by at least 50% as investors hope that profits and dividends will return. Every year they disappoint and this year I expect the disappointment to be worse than predicted due to the Libor and other fines as well as a terribly weak investment banking market. Yes, the workout areas of the banks have started to reduce loss provisions substantially from a year ago, but the former factors will still weigh heavily on their results. RBS, to me, at over 400p is certainly ripe for a large pullback and Lloyds and Barclays have similar issues to that could warrant open short positions.   


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