The UK stock market, for all the woe in the news, seems to have broken out into new trading territory.
The question is, what went right?
Since a runaway dollar nearly broke everything, the buck has been reined in and up went all the stock markets. This is because however the rout brought on by a strong dollar was reversed it meant that in effect there was more money to stick into trades like buying equities.
Engineers will recognise oscillating systems, noise and signal running together. Theory suggests that the market is pure noise, but we all know that there is a faint signal in there and this is a product of economic growth, or you might say progress. The signal is too small to profit from in the short term and possibly only capturable by long-term holding rather than short-term trading.
The long-term holders often do very well indeed and will tell the short-term brigade to forget it as they will fail. Traders often fail. Those that spurn the believers in random walks and long-term index investing tend to do one thing, look to the past to try and see if that is going to repeat. If the signal is small and the noise is large then the past doesn't affect the future. There is no symphony embedded in random noise, but if the element of signal is large enough that the future will be affected by it then the past will predict the future.
I'm sure folks that study volcanos and earthquakes deal with plenty of noise, but when there is molten lava in play you will get an indication at some point that something is going to blow, because for all the noise there is something big and non-random going on.
So markets were random and the past not influencing the future did hold pretty well. The question now, however, is are they still random, when the huge ball of lava driving the system is the central banks and their huge economic and fiscal manoeuvres. The Federal Reserve, the Bank of England and the ECB are all trying to be very predictable in an attempt to take uncertainty out of the system. That cannot make for a totally random system. So in a non-random market you are going to get strong hints from the past of what the future will bring.
So here you have the FTSE 100 poking out of its very long term trend:
Image credit: ADVFN
The doodling on this chart of the FTSE is an attempt to suggest something new is or has happened.
One minute the whole British financial system is on the brink and the Bank of England needs to stake £60bn to save it, and a few weeks later the market is trying to break its all-time high.
An optimist might say, 'The market looks a year ahead and January 2024 is when good times roll again.'
A bear will say, 'This is a classic bull trap, to lure the bulls back in to kill them again with a big slump.'
As a confused bear, I say it's a remarkable move and rather than have an opinion let it break 8,000 before I crack open the Krug. If it does then celebration really is in order. No bear lasts forever, and when it turns the good times start to roll and they roll for some time.
This is where the trick lies; you don't have to go all-in at the beginning of a new trend, but step in gently, because a new trend will run for a very long time. If it is a bull trap you do not want to put your hoof in it at all. If the FTSE goes over 8,000 something is going on and for the UK it would seem great news. A rising tide lifts all ships, and a winning equity market would shower capital down on the technologists and engineers, many of whom around the world are feeling the chilling effects of suddenly cold economic winds.
I am writing this in Dubai, and it is no jump of imagination to see a boom under way. In London it takes huge faith to see a boom around the corner. The London market, however, is not a local market, it is a market heavily influenced by goliath commodity and international trading companies. So perhaps, just perhaps, this is what we see in the London index: the beginning of a strong recovery in 2024, not at home but in the international markets outside of Europe.
On the other hand if the FTSE comes back tumbling to its old sideways channel then once again we will back into a seemingly never-ending cycle of 'going nowhere fast'.
So cross your fingers, don't pile in, and wait until you're sure, because there is a chance that the worst is behind us. If it is, do not be in a hurry, keep the Krug on ice for a bit longer than necessary, because if this move is a bull trap the move up to spring and into summer will be ugly.
Until the market is past its ATH (all-time high) only the brave and certain should play.
