Down but not out

Unabated First Growth price falls saw the Liv-ex Fine Wine 100 Index lose 3.27 per cent last month, bringing its peak-to-trough fall to 18.3 per cent. Despite these losses, it's not all bad news. A technical analysis of the index's long-term movement suggests that the overall trend remains bullish.

The chart below shows the index's progress since its inception in July 2001, along with support and resistance trend lines*. Following a period of rapid growth, the index bounced off the resistance line in late 2007 and then approached it again in 2008 before declining for several months. The market recovered and the bulls charged once more in 2009, with the index finally breaking through its pre-crisis high in early 2010. In mid 2011, however, the benchmark reached the resistance line once more and bounced off twice before retreating.

    

Last month we edged another step closer to the the support line - typically used by traders to identify buying opportunities. This trend line has provided robust support in 2009. Will it hold in 2011/12?

*A support trend line identifies the level at which prices will be supported, should the existing trend hold. Resistance trend lines, by contrast, identify the level at which prices are more likely to fall, or experience resistance to growth.

Comments

[Liv-ex]

Thank you for your comments. Tone, that is indeed an interesting question. In December we suggested that the £250 to £300 per bottle range may be where the First Growths re-enter the "buy zone". You can read more here http://www.blog.liv-ex.com/2011/12/how-low-is-too-low.html

[Tone Kelly]

Another way to look at the data is to ask the question "what is the fundamental value of the wine?" At some point the wines must be consumed. Right now the wine investment community is focused on the acquisition of fine wines. More is being acquired than consumed and the buyers are all focused on this aspect. [Reminds me of the early stages of the housing bubble.]But as Lafite 2000 or even 2002 gets to the peak - what will the holders do? If they all want to sell and their aren't enough buyers then the price falls dramatically and the net value of holding the wine drops and for those last in - there losses can be dramatic. Wine isn't a stock or business that generates ongoing value creation. It is a commodity. In one sense it is even less value than Gold as Gold doesn't deteriorate or fall apart.

[Tony Mackay]

Plot the chart in logarithmic scale and see what it shows. Absolute value charts are meaningless.