BarroMetrics Views: ‘Harbour Waves’ in the Horizon VII
Depending on what polls you look at, either:
- The ‘remain’ camp is marginally ahead.
- The ‘leave’ camp is marginally ahead.
- Both camps are equal.
With all of these numbers, the ‘undecided’ have not been included. So, clearly, they hold the key. Which brings me the bookies odds………
Bookies frame markets firstly according to their evaluation of the chances of the candidates and then alter the odds according to the weight of money.
The odds started around 50-50. Now the odds are:
- Remain 1-4 (on) (75% chance of winning)
- Leave even money (50% chance of winning).
Given the pools, the ‘remain’ camp offer less than value; the ‘leave’ camp is just value. In Buffet’s words, there is ‘no moat’ – at least as far as the probs are concerned.
So why am I keen to take a position ahead of the results? Because of the potential return if ‘leave’ wins. Assuming for the moment that the bookies’ assessments of the probs of camps’ winning are correct, the potential return is what makes the difference.
The ‘remain’ camp returns have been seen a strong move since June 16. Cable, for example, at time of writing, has moved up 8% (811 pips) in 6 trading days (about a week). Putting that range into perspective, the current ATR is (300). So we have seen a greater than weekly ATR move ahead of the referendum result.
If we look at calendar periods, the current weekly range is 411 pips, about 37% greater than normal.
With that in mind, let’s remember that our expectancy return is based not only on the probs of winning, but also on the possible return. So my assessment is:
- Remain: Prob of success x Expected Return = X
- Leave: Prob of success x Expected Return = Y.
Over a 5-day horizon after the referendum, I expect to see: if the ‘leave’ wins, a 20% drop in the Cable; and if the ‘remain’ camp wins, a 5% increase (given the move up we have already seen).
Of course, my estimates could be totally off or could be very accurate. But, this is a challenge we face with all trades.
The one thing I would emphasise: if you do initiate a trade before the referendum, keep your position size small. The size will be compensated by the increased volatility.