Master Rider Blog

Market View

September 3rd, 2007 NW Teong

My short-term view remains the same, markets would still be volatile. Let’s take a quick look at the US markets which are giving stock investors all over the world (perhaps except China stock market) the direction at the moment.

First, take a look at Dow. At current level, it is clearly at the top of the down trend lines. In addition, at 13,357, it is about 84 points away from its 50 SMA of 13,441.

Courtesy of Yahoo Finance

At this level, this is the time for me to execute my hedging strategy. If you have recalled my earlier blog of my current strategy: buy and hold some good fundamental, good potential and relatively cheap valuation stocks and buy Put option (or warrant) to provide certain degree of hedge to your portfolio. I also mentioned that in the event that market is falling, I am always ready to lock in my profit in my put position should market has fallen low enough. I always have a system to monitor all these (I have also shared these in my e-publications). Anyway, my message here is to execute my buy put option today! Of course, Dow may still continue to rise in the next few days. However, I know that at 13,500/13,600, it is a tough resistance for it to cross, at least for now!

Yes, US government has come out and provided some kind of aid programmes for housing loan borrowers and Fed has also mentioned that it will not hesitate to act should situation worsen further. Big cheers from investors, yes but only very short while. The actions by US government and Fed were themselves not surprising at all. In fact, both of these actions confirm the fact that the situation due to sub-prime loan saga was truly very bad, so much so that both the government and Fed need to do or at least perceived to be doing something about it. The action by US government has more psychological than actual impact. We should know that no government on earth will go all out to bail out the borrowers for obvious reasons. However, it is needed to prevent a loss in consumer and investor confidence, on top of political reason.

Similarly, Fed will not hesitate to act so as to prevent the destabilization of the financial system and the negative impact on real economy. We have to know that Fed, due to its unique position (no bail out of speculators but at the same time need to prevent a total collapse in investors confidence) would never reveal its actual policy before the FOMC meeting. It has to practice what I called “vague-ism”. That is, it has to remain vague enough for people to guess what it will do in its next meeting. In short, from now till 18 Sept, markets will continue to gyrate as investors would continue to debate on “the cut” or “no cut” by Fed. The funny thing about the market is that, if the markets recover very fast, the Fed may not want to cut the interest rates too early. This “mentality” of most investors will surely keep market swinging like a pendulum! My take at this moment is that Fed will cut its Fed funds rate in its next meeting for what I called “err on the safe side” policy!

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Entry Filed under: Macro, Stocks