When the torrent turns into a trickle
THANKSGIVING might not make much of an impact on most British households, but for those trading on the financial markets, it will certainly have been noticeable. As millions of Americans take leave from work to eat turkey, drink, shop and nurse their hangovers, the number actually still trading shares drops off heavily.
But it isn’t only Thanksgiving itself – which fell on Thursday – that is quiet. As David Buik, of BGC Partners, observed, today is “unlikely to be anything but a session of wholesale indifference in New York”. With Thanksgiving begins a period of relative inactivity – one which lasts into early January. Liquidity is cut off, and bid-ask spreads widen on most stocks, especially those of smaller firms, while volatility increases and price movements get less predictable.
As a result, prices at Christmas are generally thought to be less informative than normal, and indeed, last year seems evidence enough of that. The FTSE 100 hit a 15 month high of 5,538 over Christmas 2009, before falling all the way back to 5,100 by early February 2010.
So what should spread betters do to avoid getting caught? Well, as Manoj Ladwa, senior trader at ETX Capital, explains, during periods of low volume: “You don’t really want to see prices go up suddenly”. “Sustainable price increases usually happen when volume is high – institutional investors lead in buying and create momentum, then retail investors follow”. Conversely, when volume is low – and especially during the holidays, when many institutional investors aren’t trading, “it doesn’t take much to lift a few offers”, and so prices can see sudden spikes which will later disappear.
To take account of higher volatility, traders should consider widening their stop losses so as to avoid getting stopped too easily out of a profitable trade, since prices may fall quite unexpectedly before recovering. They should also limit their trades in smaller firms, which are more likely to suffer from reduced liquidity. Alastair McCaig, head of investment management at WorldSpreads, cites Vodafone as the ideal sort of company to trade over Christmas, while AIM stocks, or small mining companies, are typically likely to get a lot less liquid, and so are best avoided. McCaig advises spread betters to “pick FTSE 100 companies and probably stick to the top 40 to 60” while the holiday lasts.
He also offers some alternative advice, however. McCaig says that more of his clients call him up over Christmas “just to chat socially and escape the family” rather than to actually ask for advice. Perhaps the best way to deal with low volumes at Christmas is to take a break and actually start spending your profits, rather than trying to increase them.