Master Rider Blog

How to Tame Market Volatility?

August 10th, 2007 NW Teong

For those who have read my blog on Market Crash? Don’t Panic dated 6 Aug, you may recall that I mentioned about market volatility in that article and despite market weakness, I mentioned that I can afford to wait a while before going into the market. Quote from my blog on Market Crash? Don’t Panic dated 6 Aug: …. As you can see, market is extremely weak today (6 August 2007), I can afford to observe for the next few days before buying my list of potential stocks. unquote

I would like to point out few things to you:-

First, market always tends to overshoot or under-shoot. It overshoots during extreme bulls and under-shoot during extreme bears. While I cannot say it is extreme bear now, market sentiment is extremely weak at the moment due to eventual explosion of the sub-prime loan saga (one of my hedge fund friends told me that we are yet to see the worse. Of course, while we listen to the experts’ view, we must always listen with a pinch of salt). More often than not, this is also times for market to under-shoot. Under such scenario, it pays to be a little patient. You must still do your homework and have all the buy and sell (and target) levels ready for all your stocks in your valuation model and monitor the situation closely. I believe the trigger of our buy decisions is not too far away (well, I am saying those stocks really have great fundamentals, good growth potential and relatively inexpensive valuation….please refer to my earlier blog).

Second, watch out for liquidity. Liquidity may suddenly dry up due to the negative chain effect from the sub-prime loan debacle. This will further damp the market sentiment and force the markets to fall at a higher speed. Watch out for interest rate, watch out if there are signs for the unwinding of yen carried trades, watch out for the weakness of regional currencies if any (note: when funds pull out from local market, the local currency will be weaken vis-à-vis US$).

Third, as I mentioned before, some important anniversaries are approaching. Dates such as 911, Black Monday, will further make investors jittery about the stock markets.

Fourthly, how markets move with relative to interest rates movement? Traditionally, they are negatively co-related.

 

This is the relative movement between the 10-year treasury and Nasdaq index. If you study the above charts carefully, you will find that traditionally, the big correction in the markets will be preceded by the peak in interest rates. Have you noticed the 10-year treasury peaked around 5.2% sometime at mid June and early of July? Interestingly, Nasdaq index peaked right after that at round 2700 sometime at the middle of July.

Despite the above, I will not hesitate to execute my buy decisions after I have done my home work. For those who are really scared but still want to participate in the stock market, you may consider buy your desired stocks but hedge them against the index. (I apologise if the above charts did not appear properly, however you can always go to yahoo.finance to view these charts: ^TNX for the 10-year treasury, ^IXIC for Nasdaq chart)

Cheers!

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