This week the FTSE got massacred. That short-term spread bet idea I had was well and truly knocked out – my apologies.
And since Monday I’ve fielded more than one call from peeved investors. Why on earth is a Japanese catastrophe de-railing every market on God’s earth?
It’s a great point. Why should your pension fund take a kicking just because of a tragedy on the other side of the globe?
I’ll try to get to the bottom of that today. And en-route, I’ll show you why I think there’s a good chance that market manipulation will make sure markets rebound soon enough.
You’ve just got to tough it out. And in fact, I’ll explain today why I’m looking to get right back into another FTSE trade… betting that the market will rebound.
I want to start by looking at the history books. Then we’ll look at what’s actually happening today… and think about what could happen to your money when the dust has settled.
Modern portfolio theory isn’t enough
During the 50s and 60s the academics described what became known as ‘Modern Portfolio Theory.’ It was all about diversification really. Spread your assets around a bit and you’ll benefit from a kind of ‘free’ insurance policy.
But nowadays the financial markets have become a little too efficient… there’s so much diversification that the markets move in lockstep – there’s no more diversification to be had…
Capital flies across international borders without hindrance. Hedge funds, banks and even private investors exploit and arbitrage until they have a finger in every pie.
And today, that’s why the minute the US gets a cold we feel a sniffle coming on here in the UK. Our investments are battered by a natural disaster striking Japan, or Europe’s sovereign debt issues. Computers trade even as we sleep, making sure that all the markets rise and fall together.
But don’t worry. The academics have a new trick up their sleeve. And one that’s designed to ensure the markets not only move around together, but they keep moving upwards too!
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Why central bankers have changed everything
In the wake of the quake, the Bank of Japan (BOJ) did what any self-respecting central bank does these days. They fired up the money printing machine.
They’ve injected 26.5 trillion yen (£192 billion) into the money markets over the last three days.
Gone are the days when markets are left to sort themselves out. Today central bankers get their retaliation in first.
Of course, the markets still have their say – a panicky shifting around of prices… but soon enough, the new money starts to lube the markets…
Yesterday the Nikkei surged by more than 6%. Traders were scrambling around for over-sold bargains. Why wouldn’t they? You get some free money, why not bung it on the stock exchange and wait for the profits to crop up…
And pretty soon that money moves across the globe. A manmade tide to lift all ships.
I used to think that no investor should ever say… “It’s different this time.” But this time…
Before the mighty credit crunch of 2007/08 I could never have imagined the QE game that’s been played. And I would have had 300 years of evidence on my side too. I might have read an academic paper by a certain Professor Bernanke on how he would have tackled the Great Depression. But never could I have imagined that central banks could get away with the tricks they’re up to today.
QE seems to be working a treat… And so any major central bank that can get away with it does. Even the ECB which tells us they’re dead against QE has its ways of pumping in new cash to bolster Europe’s crumbling banking system.
Any problem that befalls the economy – be it natural, or manmade – gets the same treatment: just print more money…
And here’s the point: The stock market is like a sump for this new money.
And that’s why I say it’s different this time. A bear market is just not acceptable to the global Feds. And you shouldn’t fight the Fed!
So long as they can get away with QE, I feel confident that the stock market can rebound.
The banks have made big bets on global markets – and the Feds don’t want the banks to lose.
This is a rigged game. You might as well get stuck in.
So I say it again…
Buying the FTSE on the right dips
Today world events have undoubtedly overtaken the markets. The markets look sickly and there’s a fair amount of panic out there.
QE has more or less petered out in the UK and it’s set to expire in US in the summer. No more QE in the diary means markets falter. But I don’t believe it for a minute.
Remember, the Feds won’t sit back and watch this for long. QE is now tried and tested. They’ve not ruled out more of it after the summer – and sickly stock markets will make it more likely.
And that’s why I’m buying the dips. But not ALL of them.
On Friday, I’ll show you a couple of little ‘technical trading’ tricks to help us find the dips worth buying.
These are exciting, if a little scary, times for investors. And much as I hate to utter the ‘different this time’ words – they kind of make sense for the moment.
I just don’t see any good reason to be panicked out of your favourite stocks on account of what’s been happening across the world. And I don’t see why markets shouldn’t start moving higher again soon.
If I’m right, there’s one group of stocks that could take off quicker than most: those nifty small caps! When investor panic subsides, I’m willing to bet money will pile back into penny shares. That could be a great way to profit from the bounce back – just make sure you get some help.
And to my mind, there’s no better guy to help you with penny shares than Tom Bulford. Check out what he’s doing right here.
• This article was first published in the free investment email The Right side. Sign up to The Right Side here.
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