Perhaps the most over-used phrase that can be heard on trading floors in the past 12 months is “it’s got to pull back from here, surely”.

Meanwhile the tally of record closing and intraday highs grows.

The Dow Jones Industrial Average has pushed through 23,000, the S&P 500 above 2550, the Tech-focused Nasdaq composite has bettered 6100 and the German DAX has smashed through 13,000.

As a group, they have registered nearly 175 fresh record highs already this year, a tally that could increase further in the fourth quarter.

Furthermore, the UK UK Index sits just shy of June’s 7600 record high, showing interest in making another new record itself.

Historical precedents are easily pointed to for pre-crash comparisons of overvaluation to support the narrative for a correction.

But much like the football chant ‘sing when you’re winning, you only sing when you’re winning’, the general narrative from commentators is that things have gone too far. Even the 2017 Nobel Prize for Economics winner Richard Thaler has stated that he “can’t understand why markets keep going up.”

However, this has not come from those riding the trend. Perhaps because the former tried to call the top a while back, now sitting on losing positions and in need of a correction to ease the pain.

Or perhaps they missed the rally and, for fear of the end being just around the corner, don’t dare to buy in now.

“Hope is not a trading strategy”

Interestingly, the ‘markets’ have been at over-egged levels for days, weeks, even months, and even longer according to some commentators.

In reality, those who missed out probably only want to see a pullback for an opportunity to jump on-board what they hope is the next leg higher of a trend that still has at least some legs. After all, it’s proved costly not being on board.

Look how far markets have come in the past 12 months. Remember the Dow at 20K, 21K, 22K?

Remember the DAX at 11K and the UK Index at 7100? They can’t all be desperate to trade short and profit from a decline.

Anyway, why does the market ‘have’ to drop? There’s no obligation.

It isn’t something tangible that follows orders or crumbles under negative commentary despite occasionally falling foul of spikes and algorithms.

It’s a complex ecosystem of fear, greed and psychology, driven by investor appetite and how much more one party is prepared to pay to own something in the hope that it will rise versus how much someone else is prepared to sell it.

If the former is more desperate to own what the latter is selling, he’ll have to offer a higher price. If the latter is more desperate to offload what the former wants to buy, he’ll have to accept a lower price.

Until the balance of risk appetite changes, the trend, either up or down, can continue.

“Trade what you see, not what you want to see”

When markets are trading at fresh highs there is no psychological resistance level; there’s no vested interest from days gone by; nobody saying, “that’s my break-even level, that’s where I’ll get out”.

If there was, we might have had trouble breaking above each and every round number along the way. Have we struggled so far?  Hardly.

Yes, there have been strong inflows into large cap stocks via ETFs, sending stocks higher and attracting even more ETF money. What follows is a rinse and repeat, and therefore we have no way of knowing what will happen when this cycle ends.

Yes, extreme monetary stimulus (negative rates, quantitative easing, etc) has propped up demand for risk assets. But again, how expensive has it been staying on the side-lines watching and waiting?

The suggestion it not that this is the top for the major indices. Nor that this rally will keep going for any given time duration or percentage.

Merely, the point is that saying just because something goes up a lot doesn’t mean that it has to come down imminently. Especially not because the quintessential market trader is hoping for it. If that were the case, investing/trading would be easy. For the record, it isn’t.

Whichever camp you are in, nobody forced you to call the top early. Nobody obliged you to support a losing position, hoping it’ll come back. Nobody made you hold off and sit on the side-lines.

“The trend is your friend, until the bend at the end”

The point of this observation is that next time we see such a phenomenon, rather than trying to beat the market and call the top, a trader should allow the trend to show you that it is indeed at or near the end.

After all, you can’t make it turn south by shouting at it and telling everyone it’s gone too far.

Not unless you have an unbelievably big sway on the markets and everybody takes what you say as Gospel, such as a big bank or fund manager.

Otherwise, it can be a rather expensive fight, both in terms of financial loss and/or lost opportunity.

 “What are my current options?”

What if we see the UK 100 push on to 8,000 or 9,000 soon? What if the Dow keeps pushing on to new records, reaching 24,000, 25,000 or even 26,000? Surely anything’s possible. After all, it only took 53 trading days for the Dow to gain 100 points to 23K.

In the event that the trend does continue, those not currently long have three distinct options:

1. Do nothing and wait for a sell-off
2. Trade as intended but with a smaller deal size
3. Go long but use a stop loss or guaranteed stop.

The first option here will leave you in no position to benefit from the current stock market strength and, if the rally shows no sign of letting up, sitting on the sidelines waiting an indefinite length of time for a sell-off.

At least by utilising options 2 or 3, if global equity markets keep continuing to fresh all-time highs, you're not going to miss out, even if you do mitigate the potential risk you’re taking, although beware they may fall with the potential for losses.

For more information about how you can utilise stops to reduce the amount of risk in a trade, contact [email protected] or call 020 3051 7461.

UK 100 (UK)

Will the FTSE 100 rally back to all-time highs of 7600 (+0.7%) or fall to September lows of 7200 (-4.5%)?

• The UK’s blue-chip index has rallied from September lows of 7195 to within 50 points of its 7600 all-time high
• Momentum has turned negative for the first time since late September
• Stochastics have turned back from overbought while RSI remains close to overbought level
• Directional indicators are neutral from positive. Bearish cross or bullish kiss?

End-2017 targets:

Most Bullish: J. Safra Sarasin, Target 7900pts, +4.7% (14 Oct)

Average Target: 7433pts, -1.4% (14 Oct)

Most Bearish: City Index, Target 7095pts, -5.9% (14 Oct)

Pricing targets sourced from Investing.com on 20 October. Please contact us for a full, up to date rundown.

DAX 30 (Germany)

Will the DAX rally to a fresh all-time high of 13100 (+0.5%) or fall to August lows of 11875 (-8.9%)?

• Germany’s blue-chip index has rallied from August lows of 11875 to trade a fresh all-time intraday high of 13,095.
• Momentum remains positive, just, having fallen to its lowest level since the first week of September
• Both RSI and Stochastics have turned back from overbought in a bearish signal
• Directional indicators remain positive, with indicators diverging bullishly

End-2017 targets:

Most Bullish: Berkeley Capital, Target 14500pts, +11% (14 Oct)

Average Target: 12934pts, -0.8% (14 Oct)

Most Bearish: City Index, Target 11370pts, -13% (14 Oct)

Pricing targets sourced from Investing.com on 20 October. Please contact us for a full, up to date rundown.

Dow Jones Industrial Index (US)

Will the Dow make a fresh all-time high above 23500 (+1.1%) or fall to September lows of 21750 (-6.4%)?

• The 30-stock US index has been on an impressive run of form in 2017, notching 66 record highs since Nov 2016
• RSI is at its highest level since February, while Stochastics have remained bullishly overbought since September
• Momentum remains sharply positive, although is off its best levels
• Directional indicators continue to diverge bullishly

End-2017 targets:

Most Bullish: BMO, Target 23,500pts, +1.1% (14 Oct)

Average Target: 21,594pts, -7.1% (14 Oct)

Most Bearish: Subodh Kumar & Associates, Target 19,000pts, -18% (14 Oct)

Pricing targets sourced from Investing.com on 20 October. Please contact us for a full, up to date rundown.

S&P 500 (US)

Will the S&P make a fresh all-time high above 2,600 (+0.7%) or fall to August lows of 2425 (-5.6%)?

• The US’s blue-chip index has also cruised to multiple all-time highs this year, rallying 140pts from August lows
• Stochastics are bullishly holding around overbought, while RSI remains supported by rising lows at same level
• Momentum is positive, although is trading off its best levels
• Directional indicators continue to diverge bullishly

End-2017 targets:

Most Bullish: Key Private Bank, Target 2650pts, +3.2% (14 Oct)

Average Target: 2444pts, -4.8% (14 Oct)

Most Bearish: Subodh Kumar & Associates, Target 2100pts, -18% (14 Oct)

Pricing targets sourced from Investing.com on 20 October. Please contact us for a full, up to date rundown.

Want to take advantage of the above opportunities right now?

Whether you see UK Stocks going up or down for the remainder of the year, tradable opportunities will present themselves regularly. We’re here to help you weed them out and capitalise on them. Accendo Markets can help you increase your profit potential with the use of leveraged instruments such as CFDs, a flexible alternative to traditional shares that is currently exempt from UK stamp duty.

CFDs: Like shares, but more flexible

The example above shows how buying 1,450 shares in British Land @ £6.90 requires an outlay of around £10,000 plus commission (see left-hand box), while the same exposure via a CFD requires about £500 plus commission (see right-hand box). If a trader invests in British Land, one would assume they believe the share price is likely to move in their favour. After considering the ‘worst case scenario’ and assigning funds to cover it, the trader may conclude there’s little point in exposing the full £10,000 to the BLND shares - some of that capital could be put to good use elsewhere in the markets. (Source: IG, Prices indicative)

CFDs are leveraged instruments, but you don’t have to use the leverage

If you had, say, £10,000 to invest in the stock market, you could deposit that amount into a share dealing account and purchase shares in a company. You would pay commission to open the position, 0.5% in stamp duty and the full £10,000 will be tied up in your chosen shares with any profit or loss based on that exposure. The same £10,000 worth of exposure can be secured with a CFD for a fraction of the initial outlay thanks to leverage, with the risk and reward the same as if £10,000 worth of traditional shares were held. But should you not be interested in leverage, you can always treat CFDs like shares. Simply deposit £10,000 into a CFD trading account and take the equivalent CFD position which will tie up just £500 (note that overnight financing costs will still apply). The remaining £9,500 is not tied up, so you can use some of that to take advantage of another short-term opportunity elsewhere, or simply leave it on the account to support any losses. Best of all, using a CFD means you pay no stamp duty!

What’s your view?

Think shares will rise? Take a long position by buying CFDs (buy low, aiming to sell high). Think they’ll fall? Take a short position by selling CFDs (sell high, aiming to buy low). For a more detailed rundown of CFDs, their mechanics, associated costs and some trading scenarios download our ‘Comprehensive Guide to CFDs’ here.

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