Current UK stock prices are showing new low entry points; having carried out further analysis and strategy review work, I have highlighted, for consideration, key points for playing the current environment.
The stock market topping process and the sharp declines we have seen are following the same road map as the 2007-2009 market conditions, which were characterized by the financial crisis, oil price spike and global economic slowdown. I feel the UK market has yet to reach rock bottom and I can’t see that happening until the eurozone debt crisis has played out to its logical conclusion to stem the issue.
ECB President Jean-Claude Trichet said there were "intensified downside risks" to the economic outlook for the eurozone.
Having carried out market studies and consensus earnings estimates, the good news is that we could be in the final stages of the opening salvo of this bear market, as the current lows are displaying distinct technical characteristics of an intermediate market turbulence bottom.
If I am right then on a three month basis I think the market could follow one of two distinct scenarios.
First, retesting of the lows by the end of September followed by a strong multi-week 4th quarter rally back towards the 200 day moving average (5771 on FTSE and 1269 on S&P500), as investors optimistically view the general market sell-off as a long term buying opportunity within an ongoing bull market.
Alternatively, a relief rally could gather momentum and continue for several weeks, but my money is that it will run out of steam at the 200 day moving average, given the potential for further eruptions in the eurozone and deterioration in the economic outlook.
I would consider aggressively shorting the indices when the rally ends. It would also be a good time to reduce portfolio positions in cyclical and higher risk stocks and rotate asset allocation into more defensive sector stocks.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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