Trading tips heading towards year end

Every time Mario Draghi addresses a conference at the ECB monetary policy meeting, anything is possible. Market prices start fluctuating in all directions as traders take positions on key words said by the ECB President.

More likely than not, when the market is expecting the ECB to deliver, it under delivers and when the market expects nothing from the ECB, the President puts in a word or two to give hope, sending markets into rally mode.

Let me give you an example. In last Thursday’s meeting, traders were ready to take a position (either long or short the market) depending on what the ECB President had to say.

When Draghi was asked if the members of the Governing Council discussed extending the QE Program post March 2017, the President said that the committee did not discuss this matter.

As soon as he said that, the DAX fell by 0.50%. However, soon after the President added that he is committed to do more if needed and that they are not likely to abruptly end the QE program. As soon as he said that, the market rallied 1.50%.

This happens every time the ECB President addresses the questions of the people present for the much awaited conference. Volatility is always high and traders take the opportunity to take positions and hopefully earn a quick buck in a short period of time.

However, not everyone is a trader and strategies differ. For fundamental investors, the following are some trading tips as we head towards the close of 2016:

Reduce Exposure to long dated European Sovereigns – European Sovereigns have rallied strongly over the years. If data out of the EU continues to strengthen, we would start to see the yield curve invert putting pressure on prices. Don’t forget that the higher the duration, the higher the risk. Start reducing risk now.

Increase exposure to the DAX – Positive economic data, an accommodative ECB, a weakening Euro and positive earning season so far point towards an upward movement in the DAX. Valuations are decent and dividend yields are high. Check out BMW which is trading on a gross dividend yield of 4%.

US Financials – with the US Fed expected to continue raising rates in December, we expect US Financials to benefit from this as an increase in rates result in improved margins for Banks. Start adding to US Financials through and ETF or individual stocks. For those interested in a diversified ETF, check out SPDR ETFS EUROPE II PLC SPDR S&P US FINANCIALS UCITS ETF (LON:SXLF)

USD Currency Exposure – Hold on to you USD exposure. If data in the US continues to improve resulting in the US continuing to increase rates in 2017, the USD will continue to strengthen against the Euro pushing it back down to the EURUSD 1.05 level.

Emerging Markets Debt – reduce emerging markets debt due to a strong dollar. Emerging markets debt had a good run this year. It is time to re-allocate the proceeds into assets which can generate higher return from this point forward.

US High Yield – I do not see the need to start selling out of this asset class. With strong US economy data, an increasing oil price and rates rising by a small percentage, I do not see the risk of holding on to this asset class in the short term. If the Fed does raise rates, it is probable that we will see an immediate sell off on the news. That would be a good entry point as in history we have see a bounce back post the news of a rate hike.

US Stocks – I would shy away from US stocks for the time being. The Fed is expected to adopt restrictive policies and companies are operating at maximum margins. The good times have already been priced in. European stocks offer better upside potential today.