Prescient notes from our 2013 outlook…

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FTSE 100 Overview

Throughout much of 2012, we can see in the chart that the key benchmark UK index was effectively range bound between the two major psychological levels — 5000 and 6000, but extremely scrappy in terms of the price action. What we saw for the most part over the past year was plenty of double backing of the price action during both rallies and sell-offs, ensuring that it was nigh on impossible for most traders to gain traction from simply buying or selling and then holding onto their positions. In short, trend following was out in 2012. 

Timing was definitely everything. It was also the case that the initial jump in the index from the start of January through to mid March was exactly the opposite of what most market commentators were expecting (as is usually the case!!). Once the rally got underway and we were back up at 5900+ by mid February, it would have been logical to assume that having factored in the full consequences of a double dip recession and a Eurozone breakup spewing its toxic debris across the English Channel, that breaking through the key 6000 barrier should have been a piece of cake. Alas, it was not to be. From early April, it was simply whiplash price action, banking scandals, mining stock disappointments and a tale of two High Streets.  

So, what can we say about the economic performance of UK Plc? during 2012? Firstly, the 2 key events — the Diamond Jubilee and the London Olympics acted as a buffer to the continued economic weakness (weather not withstanding!)  It can be argued that these two events were probably enough to ensure that the UK economy emerged from recession in Q3 2012 a decent 0.9% print. Anyone looking for the visual manifestation of this GDP relief need look no further than the mid-November rebound for the UK stock index which also accompanied the return of President Obama to the White House. Indeed, a significant bear trap rebound occurred and will probably be enough to ensure that we shall not see sustained price action below the 200 day moving average, currently at 5725, for quite some time. In fact, if this were not the FTSE 100, and not such a troublesome market, one would suggest that the 200 day line might not be seen for many months or even years to come. 

As with many global markets, the FTSE 100 was able to squeeze back up, tantalisingly close to the 6000, by the end of the year in the face of the “fiscal cliff” issues. A break of 6000 will be extremely noteworthy as it has acted as an impenetrable barrier for much of the past decade and will most likely carry the index onto the previous all time highs around 6900.


With the market now standing at precisely around 25% of its 1990 peak, it is difficult for both domestic Japanese & overseas investors to regard the Nikkei as anything other than cheap. In the very near term, notwithstanding the significant gains seen from material two-year support around the 8300-8500 level as we can see in the chart, the Nikkei is likely to stretch towards the top of a rising trend channel from the start of 2011 with an implied target of 10,500. Make no mistake, the very sharp move we have recently seen is usually synonymous with the commencement of strong bull markets

The Nikkei is our pick of the crop out of all the major markets on valuation terms, trading around book value at present, but offering, as detailed above, a fantastic operational gearing profile. Consequently, any dips in the index back towards the 7 month moving average (presently around 9200) which is likely to occur as the new Abe inflationary policies take time to actually show results, is a level we will be getting aggressively long. We suggest a core long position throughout the year that is added to progressively on any retracements back to this key moving average. We target 13000 by year end 2013.


Given our bearish stance, but still keeping in mind the potential of a sharp spike to the upside on a Greek Euro exit during 2013, then we prefer to play this view by way of an outright short position with a protective call option just around the year high of approx $1800. It is important to continue to open the call protection upon the expiry of the contract of course. Ditto, should the gold price fall further then opening a new lower strike call option is a prudent way to manage the position.



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