Tag Archives: context

While U.K. markets have been trading downwards in the past month over Greece concerns, I see this as temporary. However, I still maintain that the S&P 500 index is overvalued. I see potential value in a long EWU/short SDS ETF pairs trading strategy. In a previous article written on May 22, I argued that a significant pairs trading opportunity exists through taking a long position on the FTSE 100 and a short position on the S&P 500. The purpose of this article is to both review the performance of this strategy in light of developments in June, and further discuss the strategy in the context of specific ETF performance. On a one-month basis, the iShares MSCI United Kingdom Index ETF (NYSEARCA: EWU ), which approximates the returns on the MSCI United Kingdom Index returned -2.34 percent, which has been less severe than the -4.24 percent return on the FTSE 100 over the same period. On the other hand, the ProShares UltraShort S&P 500 ETF (NYSEARCA: SDS ) has returned 1.05 percent this month. On balance, this would have been a losing pairs trade based on lower than expected stock market performance in the United Kingdom. However, is there a prospect of reversal in this regard? In my opinion, economic fundamentals in the United Kingdom are solid and returns are being driven lower in tandem with European shares as a result of uncertainty in Greece, which has seen the FTSE 100 hit a three-month low. However, I had previously expressed my optimism that an upturn in property markets in the U.K. would lead the index higher over time, and while U.K. markets as a whole are lower, construction firms have bucked the trend with firms such as Berkeley, Persimmon and Barratt Developments all seeing gains this month. In this context, I expect that while U.K. markets may see volatility in the short-term as a result of the Greek crisis, long-run growth will ultimately push the index higher. On the other hand, we have seen that the S&P 500 has been falling as expected this month by -0.75 percent and the inverse ETF returning 1.05 percent accordingly. I still maintain that US stocks have little room left to run in terms of valuation, and this is evidenced not only by falling returns but also concerns of potential overvaluation among large consumer discretionary stocks. For instance, an article from ValueWalk makes the point that while the segment had expected a 16.9 percent growth rate at the beginning of the year, it has seen the fourth-biggest decline in earnings growth expectations. Moreover, I had also stated in the previous article that while the S&P 500 had trended upward until recently, US equity inflows had been falling which had raised concerns of a pullback which we now appear to be seeing. To conclude, I expect that U.K. stock markets may undergo some short-term volatility as a result of the Greek crisis. However, I still see potential for growth once the initial contagion subsides, and maintain my view on a long MSCI U.K./short S&P 500 trade. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.