Markets are on a big move!!

Most main markets are very highly correlated (correlation is a statistical measure, it indicates strength of relationship between data). Specifically, the big falls and rises tend to happen in tandem. DAX and CAC, or FTSE and DowJones on a daily basis on average might move by differing magnitude and direction. However, what correltion tells us is that there are some moves that tend to co-occur. A simple analysis of the indices data shows that it is the large moves that tend to co-occur most often.

Today the 6th July (Monday) is one of those days, a large and negative move throughout all main markets has pertruded world markets. Also on a larger granularity, over March, April, May FTSE market has steadily increased in value, and a negative trend is clearly emerging during June and July! Dow Jones, DAX, CAC, NYSE, etc... show all the same pattern, not surprising since mass psychology affects every market participant to a degree.

In my opinion, July will with certainty see some decrease of valuation over all major indices. Reasons??! A number of them: Macroeconomic figures, Company outlooks, political, environmental stability and most Technical Analysis points towards investors' uncertainty surrounding recent price advances.

Monday 8th Dec 2008

FTSE rose to 4300 by 6% today. A good time to sell short might be tomorrow, this depends on overnight movements in markets. However 4400-4600 is a strong resistance against upward moves, so plunging into any long trades with both feet would yet not be a wise move.

Todays' bullish world market performance (Nikkei 5.20%, DAX 7.63%, CAC 8.40%) is attributed to Barack Obama's rescue package plans [see http://biz.yahoo.com/ap/081208/wall_street.html].

Cornered into an illiquid market

Short selling is a simple technique that enables traders to make profit on down trends. The underlying process involves borrowing shares, selling them instantly, rebuying the same number of shares at a later point and returning them to the lender. The lender makes their profit from a small interest paid for the privilege of borrowing shares and of course in their best interest hopes for share prices to go up.

I came across the VW/Porshe - Hedge Funds story on BBC today, see http://news.bbc.co.uk/1/hi/business/7697082.stm. Share prices VW have soared by over 300% in the past 3 business days. Many Hedge Funds found themselves in lossy short positions after Porshe anounced that it owns over 70% of VW. These short positions got cornered, not enough shares on the free market as most are owned by Porshe.

"'Each and any short-seller in the world is trying to close up their position and there is no way they can do it, except for trying to buy like mad,' said Heino Ruland, an analyst at FrankfurtFinanz. What is upsetting the hedge funds is that if between 10% and 15% of VW shares were on loan to be shorted and only just over 5% were available in the market, it is likely that many of the funds that shorted VW had borrowed the shares from Porsche." [source: BBC article]

VW is now clearly overvalued, so what does this mean?!! I wonder at what point the shares start falling? "VW's shares peaked on Tuesday at 1,005 euros, valuing the company at 296bn euros ($370bn; £237bn), which is well over the $343bn value of Exxon Mobil - previously the world's most valuable company. Last Friday, VW's shares closed below 200 euros. As an indication of how extreme the market valuation is, last year Exxon made profits of $41bn on sales of $390bn while Volkswagen managed profits of about $8bn on sales of $136bn." [source: BBC article]

This is a stock to watch, maybe once the lossy short positions are accounted for the stock will plummet down?!!