rather than pick out individual stocks to trade, it can often be worthwhile to trade the indices themselves, especially in times of high volatility.

for those so inclined, i attach below charts for FTSE and FTSE 250, though one might equally be tempted to trade Dow or S&P, which is significantly broader in its coverage, or even NASDAQ

for ease of reading, i have attached 1 year and 3 month charts in each instance

yes, though that and the feelgood factor it will engender, is somewhat peripheral and certainly short-lived

for what it's worth, and just maybe a reflection of F/E trade, IG indicating today as i write

FTSE -60 @ 5245
DOW +72 @ 10240
Gold +5.35 @ $1098
US light crude unchanged @ $74.50

yes, it could be an interesting day. DAX and FTSE indicating to open far less lower than the predictions at 21.00 on Friday night. Whether it stays that way remains to be seen.

DOW futures currently +63. I wonder how long that will hold once trading gets under way? Just happy to watch today; No position.

Beware the 4 new asset bubbles
By Shawn Tully, senior editor at largeJanuary 25, 2010: 11:02 AM ET


NEW YORK (Fortune) -- Here we go again.

Less than two years after the housing market collapsed, the U.S. economy is threatened by a new bubble in asset prices. This time, four billowing balloons are hovering: two commodities -- gold and oil -- stocks, and government bonds.

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Don't be fooled into thinking that last week's 5% drop in the S&P, and the recent sell-off in oil, remotely makes them fairly valued, let alone bargains. Equities and commodities, as well as Treasuries, which actually rallied as stocks dropped, still have a long way to fall. The reason: They've already seen huge run-ups that put their prices far above their historic averages, and far above the levels justified by fundamentals.

Two examples: Most companies can't possibly grow earnings fast enough to support their lofty valuations, and oil and gold are so expensive that we'll see what high prices always bring, a surge in new supply. That makes a price-pounding glut inevitable.

Since the start of 2009, oil has returned to the danger zone by jumping 63% to $75 a barrel, and gold has risen more than 20% to set astounding new records by climbing above $1,100 an ounce. After briefly returning to historically normal valuations in March, stocks are now selling at price-to-earnings multiples 40% above their historic range of 14, and 10-year Treasuries are so pricey that they yield 1.5% less than they did in 2007.

What's causing this resurgence of speculative fervor? One view blames the same policy that caused the real estate rampage -- incredibly low interest rates that are flooding the banks with cheap funds that, in theory, are available for loans. (The current Fed target rate is between 0 and 0.25%.)

"Investors can borrow at extremely low rates to buy assets," says Brian Wesbury, a monetary specialist at mutual fund manager First Trust. "So they're using cheap debt to bid up prices. The Fed's expansionary policies are making assets look a lot less risky than they really are."

Other prominent economists dispute that we're in bubble territory, at least right now. Allan Meltzer, the distinguished monetarist at Carnegie Mellon, argues that even though banks are loaded with cheap money, they aren't lending -- which is why we have a credit crunch. "I would be a lot more concerned if loan demand were higher," says Meltzer.

The one asset that definitely isn't bubbling is housing. There, prices have fallen to a level where new buyers buy a house for the same total monthly cost as rental. That's gravity operating.

So how do you spot a bubble? My view is that we're now seeing the same signs that exposed the frenzy in real estate: prices flying far above their historic averages, measured either in inflation-adjusted dollars (commodities) or as a ratio of the income they produce (stocks and Treasuries). Watch for gravity to take over, just as it did in housing.

Treasuries

The rate on the 10-year Treasury bill is now a mere 3.6%, well below the 5.5% rate that it averaged between 1993 and 2007, a period where inflation ran at an annual 3% clip, meaning that the "real rate" after inflation, stood at about 2.5%.

So let's assume that future inflation also averages 3%, about where it stood in the second half of 2009. At today's prices, Treasuries are offering a real yield of just 0.6% -- 1.9 points below our 14-year average.

But as the economy recovers and the threat of inflation causes the Fed to tighten monetary policy by raising rates, the yield could rise to 5.5%, handing investors a big loss. Reminder: When yields rise, bond prices fall.

Yet even that scenario is optimistic. Given the huge deficits from the bailouts, it's likely that investors will want a far bigger cushion for expected inflation -- which suggests, says Wesbury, that the yield on 10-year bills could go over 6% in 2011.

Oil

At around $75 a barrel, oil may look like a bargain compared to the record $148 in mid-2007. But we've simply moved from an immense bubble to a moderate one.

For oil, as in all commodity markets, the highest-cost unit that customers are willing to buy to "clear the market" sets the price. Indeed, prices can go far above cost for short periods, since it takes time for producers to drill new wells or because they hoard inventories.

So how much are oil companies paying to produce the world's most expensive barrels of oil? A good estimate is $55 to $60 a barrel. That's what it costs Anadarko Petroleum (APC, Fortune 500) to extract oil from deep wells in the Gulf of Mexico, according to Anadarko CEO Jim Hackett.

Hence, the world's highest-cost producers are now earning 30% to 40% margins. It won't last; to take advantage of the prices, oil companies will ramp up production, and that extra supply will cause prices to fall back into the $55 range, or even lower.

Gold

Investors are rushing to gold, because they rightly fear far higher inflation in the next couple of years and want to hedge against both rising prices and a declining dollar with a commodity that, they claim, has a fixed supply.

Since early 2009, the price has jumped to $1,100 an ounce from $875, triple its average price between 1990 and 2004. Yet the supply of gold is far more fluid than the gold bugs admit, partly because mining companies are investing heavily to increase production.

The real threat: Prices are so high all over the world that people who once treasured their gold jewelry are now rushing to sell it. Swiss refiners are offering irresistible prices for bracelets and brooches, "cash-for-gold" stores are in Chicago malls, and suburbanites are hosting Tupperware-style parties where neighbors show up to hock their gold teeth.

When this happened in the early 1980s with silver, prices plummeted from $50 to $15 in less than a year. Look for gold to end up below $500 an ounce within two years.

Stocks

Let's assume that investors want a 10% return from stocks (a 7% real return plus 3% gains from inflation). But at current prices, there is no way that the S&P can deliver those kind of gains in future years.

Here's why: Think of the S&P as one company that provides a total return in two components, a dividend yield and a capital gain. Together, the two should equal 10%. But the two are inversely correlated. The lower the dividend yield, the higher the earnings growth rate must be to get you to that 10%. When yields are extremely low, those growth rates become mathematically impossible.

Right now, the P/E multiple for the S&P is an extremely high 20, based on a formula developed by economist Robert Shiller that removes the constant gyrations that can under or overstate the ratio, and the dividend yield is just over 2%. So to hit that 10%, earnings must rise 8% -- assuming 3% inflation, 5% annually in real terms.

But earnings tend to track GDP, which rises about 3% a year over long periods, though far more slowly in a recession. So 3% real GDP growth isn't nearly enough to lift profits 5%. That implies that stock prices must drop sharply: A fallback to their historic P/E of around 14 would require a 29% correction, taking the S&P from its current level of 1,092 to around 770.

"Stocks will disappoint us if we buy them when they're expensive and delight us if we buy them when they're cheap," says Rob Arnott, chief of asset manager Research Affiliates. Now, they're extremely expensive, and destined to disappoint.

Bb
thanks for that. it is an interesting read. it is just one persons view.i do however like his use and knowledge of the word gravity. that to me speaks of equilibrium which i see as half way. prices will continue to gyrate around this half way level level until or unless an outside force acts upon it, according to Newtons law.it seems particularly applicable to his Oil comment at present.
as for the ftse, a pull back/retracement is long overdue and can only be good for bulls.question is how far back will it come? maybe this time, maybe not, i dont know. what i do know is that it will happen.
im usually late, because i'm often wrong. but i am still a long term bear and still currently nett long protected with stop losses.
the timing of the article is curious.
regards
jkd
edit those stop losses are actualy all either stop out at cost or stop out at profit. sometimes the use of the phrase stop loss can be misleading.

Chartist on CNBC last friday reckoned the crucial point was 5175.
2517

It's a real knockdown, very much based on the drop in crude prices with metals retreating as well.....ftse seems to be very much governed by those commodities rather than world events. Should the price of WTI turn, so will ftse's fortunes.

rf-------it's the banks again (Spanish this time)
2517

what a gruesome week this is turning out to be, following on from much the same the previous week.

FTSE now hovering on the chart-important 5200 level, and looking quite keen to break below it.

USA december retail and home sales and just about all other indicators there have been nothing short of dreadful, and it remains to be seen whether obama's speech this evening makes one iota of difference for more than 10 minutes

Do you know what time he is speaking?

Dollar getting stronger isn't helping, that correlation didn't seem to be working early doors today but it sure is now, any weakness Dow spikes and vice versa.

skinny - 19:15 UK time from memory

=====

one quite serious glimmer of hope, though it won't do anything for the markets this week, is that chemical exports from USA have suddenly rocketed within the last few weeks ..... the implication of that is not just that US prices now look cheap, but that the end-users are starting to restock - much of it in F/E at a guess

Thanks Cynic.

I bet he doesn't speak from memory cynic :-)

good job he doesn't, cos he's not on stage until later ..... it's Fed report at 19:15 uk time

hold your breath guys n dolls ..... dow looks to be trying to end in positive territory

Short squeeze might be quite interesting

Hopefully a wee bounce on the FTSE tomorrow:
"US shares recovered after the Federal Reserve held interest rates at near zero, while Apple launched its eagerly awaited iPad tablet computer.

Dow Jones closed up 41 at 10,236. Nasdaq added 17 at 2,221 while the S&P 500 added 5 at 1,097.

In its keenly watched statement, the Fed keep its stance on the economy little changed from last time, suggesting it has continued to strengthen since December's meeting."

london is bound to open strong (indicating +58) to very strong today, and even TLW my regain some ground! ..... strong in NY followed by big bounce (i think) in F/E ....... question is whether or not the gains can be held