Whether the FTSE is above or below 4,000 is irrelevant and I say that as a former technical trader myself. Paying attention to such things is what academics would call “point blindness”.
The stock index “point” is a media obsession. When you read in the Evening Standard or the FT that the FTSE fell 40 points in a day, you don’t really learn anything. Because, and not a lot of people know this, the value of a stock index “point” changes from time to time. The value of an index point can change much the same as a currency’s exchange rate.
If the price of a car has risen by 50% in pounds and the value of a pound has fallen in half, the real value of the pound hasn’t changed at all. Likewise, without knowing what a FTSE index point is worth, a newspaper headline on how far it has risen or fallen is meaningless and could actually be harmful to your understanding of what’s happening in the market.
We’ve uncovered an indicator that paints a cautiously optimistic picture of the bear market and may even be pointing to a recovery sooner than most realise...
The number that counts
While the day-by-day value of the FTSE 100 changes, one thing has been consistent through the credit crunch... volatility.
This bear market has been so volatile that we have unconsciously grown to accept it. However, just two years ago it was oh so different. A move, up or down, of more than 2% was “abnormal”, i.e. big and noteworthy. Nowadays, stocks trade wildly and you’d hardly even notice…
But it is exactly this familiarity with volatility that will cause investors to miss the turn around in the market. Anyone who believes the bear market will end with a bang and the stock market shooting up 25% is dead wrong. The bear market will end, like the many bear markets that preceded it, with a whimper. According to one investment indicator, it may have already bottomed… the Average True Range (ATR for short).
ATR is normally a tool for technical traders. It looks at the peaks and troughs in the market over the past 14 days and makes an average. This gives the trader a sense of how volatile the market is. It also helps them to set stop-loss orders at a level that will not be triggered prematurely while still protecting against the risk of a big sell-off.
It can be a great bellwether for long-term buy and hold investors too. Never mind the headline figure, but look to see the general trend. A falling ATR means that volatility is going down and a rising ATR indicates that it is still rising.
If ATR is anything to go by, we could well be on a quiet road to recovery…
What the average true range tells us today
Take a look at the chart below and you’ll see the trend forming. Ignore what’s happening on the FTSE, the real action is happening underneath. The grey line is the average volatility for the previous 14 days. You can see that since peaking in October last year – when Lehman Brothers collapsed – the market has been generally a lot less volatile.
Average True Range is falling, which means volatility is too 
Dipping back below 100 is good news. The FTSE’s volatility hasn’t been that low since before the credit crunch kicked off in 2007. This clear downtrend could well represent a return to normality in the stock market.
You see, when average volatility starts to fall then slowly investors will come back to the market. Investors like a market where they can manage risk, if that is impossible because the moves on the market are so unpredictable, they stay away. Now that the trend is reversing we might start to see the buyers come back.
The stock market recovery will not be evidenced by a massive upward swing. It’ll be more subtle than that and that is why so many investors will miss it. By interpreting the market rather than just looking at it, you too can be in that profitable minority.
Happy Easter. Please note, there will be no issue of The Right Side on Easter Monday.
In the meantime, look out for a special issue from Tom Bulford tomorrow. It’s all about the “mattress syndrome” – and how it can help spot shares that are about to rocket. Intriguing stuff…
Best wishes,
Theo Casey,
For The Right Side
Editor’s note: Theo Casey is the investment director for The Fleet Street Letter, a contrarian investment service. In the latest issue Theo discusses a new and largely unknown market indicator and shows investors the best time to buy.
MARKET NOTES
India and Brazil to outperform emerging Europe
BY SHIVVY ARORA
Economies such as Brazil and India are weathering the storm better than its peers. And of the major emerging economies, Hungary, the Czech Republic and Russia are lagging behind. One of the reasons for this is the varied dependency on exports.
A World Bank report shows that 17 of the G20 countries have recently set up trade barriers. This is known as “protectionism” or restrictions on trade between states, which heavily harms exports industries. And some emerging markets will be more vulnerable to this than others.
The chart below shows exports as a percentage of GDP for a selection of main emerging economies. You can see that exports equal a whopping 80% of GDP in both the Czech Republic and Hungary. Over half of these are shipped to its main trading partner – the recession-stricken eurozone.
Taiwan is next on the list – exports here account for 60% of GDP. By contrast, exports account for just under 15% of GDP in Brazil, and India is at approx. 22%.
Export-heavy countries are higher risk…
Source: Capital Economics/Thomson Datastream
If protectionism starts to grow, countries that are export-heavy will get hit harder and have the most to lose. However, nations such as India and Brazil that are less export-dependent will have reduced exposure. They are less vulnerable to falling global exports demand and trade restrictions.
So for exposure to rapid growth, emerging economies such as Brazil and India remain the places to look.
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