Titan Investment Partners – After the worst January in 4 years, which way now for the market?

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So, it seems that our bear call at the beginning of the year was not only bold but somewhat prescient. Having to argue the case with pretty much all and sundry including every contributor to this publication told me everything I personally needed to know about the markets likely near term direction, namely that the boat was so lopsided that in unison with the technical conditions detailed here – http://www.spreadbetmagazine.com/blog/titan-investment-partners-why-we-have-moved-to-a-maximum-net.html that there was only way way to go. Remember, the market is designed to catch as many people out as possible at the most inopportune time!

The stats reveal that the arithmetic weighted index (and so a skewed picture where the highest priced stocks have a disproportionate effect on the index value rather than the market cap weighted one like the S&P 500) that is the Dow Jones Index, fell 5.3% whilst the S&P 500 fell some 3.6%. What was all the more surprising to many was that every single day bar one in January saw the Dow move by triple digit figures. Volatility is back and where there is volatility there is trading opportunity.

That it was the first decline in the month of January since 2010 is not in itself a cast iron guarantee of lower prices for the rest of year as the so called “Where January goes, so goes the year” (and as detailed here – http://www.spreadbetmagazine.com/blog/?currentPage=2) saying implies. In fact the “hit” rate in following this adage is only 58% – not much better than flipping a coin. The last down Jan in 2010, as the chart below shows, saw the S&P 500 actually rise by approx 10% that year, and after a much deeper January drawdown of around 8%. That said, this was only the 2nd year of the bull run and not the 5th year like now. We haven’t researched it indepth but my guess is that the January down years that come after 4 years of a bull run are far more likely to result in down years overall.

S&P 2010 chart

So, as we enter February, question is which way now? From our perspective, in looking at the 10 year weekly chart of the FTSE 100 in particular, what strikes me is that the area around 6150-6200 is rather inviting a test of it before this rout is over. The RSI has slipped below 50 and the price action here over the next several weeks will likely determine whether the bear has started in earnest or whether the bulls have one last shot at taking out 7000.

FTSE100 Ten Year chart

The top horizontal line shows that the market has attempted on a weekly basis to take out 6850 on no less than 7 occassions now, only to fail at each attempt. As already relayed, with the RSI back down under 50, any base building that takes us back up towards the high will however likely have the “techincal fuel” to propel it through.

In contrast, on the bear side, the falling RSI is not a good omen and we can see that the 37 wk EMA is beginning to plateu. The last two occassions when this happened in late 2007 and mid 2011, the market entered (a) a devastating bear market and (b) a sharp downdraft that took the market another 10% lower respectively. As ever, the jury is out. 

Pushed to make a call, I would say that we see a visit of the low 6000’s before this shakeout (and which is actually a very modest one at present) finds a short term floor. An RSI measure in the 30’s and a FTSE level of around 6200 would give us the confidence to go long again.

So what have we been doing at Titan in recent weeks? We have been taking profits on our short U.S. position and, given the heavy underweighting of Emerging Markets by global fund managers that has likely increased in recent days, and always looking to take the other side of extreme contrarian trades, we have been building selected emerging markets equities and currency exposure in our global macro account. Additionally, we took profit on our gold futures position and re weighted via options to address the risk profile here.

One market that is however reappearing on our radar is the Japanese equity market and that we wrote about here on page (34) of our New Year edition – http://issuu.com/spreadbetmagazine/docs/spreadbet_magazine_v24_generic re a potential option strategy to play this make with a cracking risk/reward profile.

The chart below shows that, with a likely gap lower tonight per CME futures on Fridays close, the Nikkei will have fallen by a shade over 10% during January from its high of just over 16,300 on New Years eve. What is interesting to us however is that the RSI and stochastic measures are coming back to levels that have been consistent since the commencement of the bull run in late 2012 with sharp rebounds (highlighted in red circles and green lines). As ever, there are no guarantees in the market but with Japan being the only economy still agressively pumping money into its economy, as with our call on a decline in early January for the U.S markets, we like these odds. 

Nikkei 18 month daily chart

Over the next few weeks we are likely to begin building Japanese exposure again and also looking for opportune points to position ourselves in the FTSE. The catalyst could be a new rate cut by the ECB next week. 

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You should not take this piece as an advocation to trade in any of the instruments mentioned and should always take professional advice in relation to your own personal circumstances.

All Titan Funds operate within a spread betting account which means gains or losses are currently free of tax. However, legislation can change in the future. Spread betting is a leveraged product which could result in losses of some or even all of your initial deposit. Ensure you fully understand the risks.

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