The growth of Binary Options in terms of their popularity in recent years has occurred, for the most part, against a pretty consistent background of the performance of the main stock markets.
I don’t normally comment on the big picture background, much less engage in any sort of prediction about where the markets are headed, but there are a few points worth noting.
After crashing by over 50% from their 2007 highs, the main indexes – the DOW30, S&P500, Nasdaq, FTSE100, etc. – began a long term recovery in March 2009.
Few at the time would have seen how far this recovery would go. By 2010 it had developed into a well established uptrend and, while there were some corrections during 2011 and 2012, a big push in 2013 moved many of these indices through the old highs.
This year, 2015, has seen mostly range-bound trading punctuated by marginal new highs. The uptrend remains intact, despite the mostly range-bound trading.
It is impossible to miss the fact that there appears to be something of a disconnect between stock markets that are making all-time highs and the general economic performance.
While there has indeed between a reasonable recovery from the crash of 2007-08, economic performance is by no means spectacular and there are some obvious weakness.
This is not just my opinion. How about this recent headline from Bloomberg.com:
Overall, we have seen a so-so economic performance and the weaknesses in commodity markets partly reflect this.
Developments in China are also a cause for concern and, to be honest, the Chinese economy just does not make sense from a Western perspective.
I know it is something of a great experiment, but can a Government really control and direct an economy with such a divergence between what is now happening and what has been the experience of Western capitalism over a number of centuries?
Both these are negatives but there is one great positive, from the point of view of what is propping up and propelling markets.
Central Banks around the world have greatly increased the money supply in most currency areas. Saying they have kept interest rates at historically low levels for a prolonged period is just another way of saying this.
However, this money has not found its way into ‘real’ economies as was hoped but has stayed within the financial system.
As a result, a period of record monetary stimulus has coincided with the longest period for many decades of annual growth below 3 percent. This is shown in the chart below.
It’s inflation, but not as we know it and not as the word is generally used.
Eventually this policy will have to stop. Will this reverse what has happen? And when might this happened?
Nobody knows the answer to these questions but stock markets driven by liquidity is an accident waiting to happen. Or a party before an almighty handover.
Leaving aside these fundamental concerns, there are also technical issues worth noting.
As anyone who has read the Free eBook Introductory Guide to Trading Binary Options will know, I concentrate much more on technical rather than fundamental information when trading.
The first is that the most recent stage of the bull market has gone on for almost 4 years without a correction, that is, a pullback of at least 10%.
This is highly unusual and makes this the 3rd longest such period in history. Nothing to say it will not go further however.
The second technical issue may be of more concern in the short term and was recently well illustrated by an article by DR Barton in an issue of Van Tharp’s weekly newsletter Tharp’s Thoughts (Issue 744).
The article was entitled Market Breadth Really Stinks – When Will it Finally Matter?, which might give you an idea of what it contained.
Market breadth is a measure of the extent to which a rise in a market depends on a broad range of stocks rising, or on a few stocks outperforming.
The latter is usually thought to be a sign that an uptrend is tired and may be about to reverse.
The current situation is striking. Recent highs in US stock markets coincided with few stocks rising and more making 52 week lows than made 52 week highs.
This feature is illustrated in the following chart, taken from Barton’s article, which shows that as the Nasdaq has continued to rise over the past year (dark line), the number of stocks trading above their 50 day moving averages has fallen.
Notably, this same divergence was seen just before the 2007 crash when the Nasdaq fell by almost 55%.
Barton is keen to point out that this has been seen before and is not a forecast that a crash is imminent. However, it is an indication that the uptrend is starting to look very tired.
Does this mean that things are about to change? Who knows? Not me. That’s not the point here.
But does the generally benign background in the stock market since 2009 have anything to do with the growth of Binary Options in this period? Binary Options remain classed as ‘exotic options’ and new ‘exotic’ or ‘innovative’ products tend to do well in bull markets.
There is also an issue of participation. Participation in trading tends to rise when markets are doing well as people are attracted by the lure of profits.
Binary Options are often an entry vehicle for new traders. If things changed in the stock market, would we also see a change in the growth of Binary Options?
It’s a question worth asking as the viability of many brokers may well depend on consistent, ongoing growth.
It’s also worthwhile for each trader to ask themselves how they would react if a market crash occurred. Would such an event cause you to stop trading?
The fact is that there is no good reason why someone trading Binary Options should be greatly affected by such a crash, provided their broker remains solvent.
It should make no difference which way the market is moving – as long as you know which way it is moving and trade accordingly.
What Experienced Traders Know
I’m not predicting a market crash, much less that the growth in the popularity of Binary Options will reverse.
A market correction will happen sometime but I don’t know any better than everyone else when this will happen.
Don’t believe anyone who tells you any different. At best they are just pointing to a favored indicator that is right more than it is wrong.
But they may also be just making up a headline to attract your attention knowing that they will be right some of the time.
The difference between experienced and new traders is that they know these things.
They know that a correction will happen sometime. They also know that they don’t know when it will happen.
This causes them to focus on recognizing when it might be happening and acting accordingly.
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