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Riskiness of the UK Stock Market

Author: slg
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Today we do of course have the UK Spring Budget - always a potential source of uncertainty. For what it's worth we expect quite an upbeat pro-business set of observations and most likely few major changes.

Let's look at what kind of shape the market is in going into this event.

Here we show (blue Line) the changing value of the FTSE100 index since four months ago. We also show the Daily Value at Risk (Red Line) for the index based upon its movement over the past 10 business days. This expresses an estimate of how many index points could be lost in one day with only a 1:20 chance of seeing this number exceeded.

Notice that, as of today, the FTSE has been on a mostly steady climb since last November. There has been the odd minor setback and when these have occurred they have been associated with an increase in risk as measured by Value at Risk. Notice that while the VaR had been mostly on downward trend until three days ago this has now picked up noticeably. This could indicate a further reversal in the stock index as was the case when the same happened in mid-January of this year.

It should be emphasised that these measures are not, in our view at least, predictive. The purpose here is to understand the condition of the market NOW. If we can understand how the market is now we can also form judgements as to the wisdom of adding to or reducing market exposures at this time. This is consistent with SLG’s wider take on the use of Technical Analysis. See our Library module.

Value at Risk (VaR) is a measure based upon orthodox statistical techniques (normal distribution, standard deviation). How it is calculated is, while quite simple, beyond what the reader may find necessary in this context. (Examples of calculation can be found here: https://web.stanford.edu/class/msande444/2012/MS&E444_2012_Group2a.pdf ) In this case it is used to express how many index points could, based upon the recent (last 10 business days) riskiness of the market, be lost in one day’s trading and with a 1 in 20 chance of that number being exceeded. For example if the number is ‘80’ the there is a 5% (1 in 20) chance that the index could lose more than 80 points but a 95% chance of a gain or off a loss not exceeding 80 points.

FTSE 100 index. 12 month daily history.

Here we show the last 12 months of daily price history for the FTSE100 index in ‘candlesticks’ (the vertical bars) as well as the 50 day (green), 100 day (black) and 200 day (red) Simple Moving Averages.

The most important observation here is that the market remains comfortably above all of these averages. You can also see a histogram of daily volumes traded in the lower part of the diagram. The only recent day with above average volume was Wednesday 1st March when the market moved up quite strongly. This suggests no lack of buying demand, so a good sign.



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