/ 11 May 2010

Shorting the market paid dividends

Ah, good to have the volatility back. Who says trading 5% swings is not fun? After staring at the abyss on Thursday and Friday, the market recovered massively on Monday after news of a bailout for Greece surfaced late on Sunday night.

We caught this one sweetly, with riding the short equity position for the last week and continuing to add to our long volatility position up until the spike on Friday.

We were rewarded handsomely with the VIX index in the United States staging its biggest one-day rally in years to 41% and the benchmark Dow Jones at one stage dropping almost 1 000 points to its biggest points drop ever, before staging a mild recovery.

So where to from here? How does one digest all the news and make a rational trade with all the conflicting noise? Well, the one concern is that the euro will continue to weaken even after the “bailout” and is currently trading at levels it was on Friday.

That means the forex markets don’t believe it, or at least doubt the story. And the flight to quality still remains intact with gold firmly above $1 200 dollars, regaining its safe-haven status.

I think that some more caution is warranted as there appears to still be some headwinds on the local front and still on the macro front.

China is the latest to spook us, with its consumer prices rising at the fastest pace in 18 months, and property prices jumping 12,8%. Its benchmark index is now down more than 10% from the high, officially putting it in bear market territory. It appears that inflation on that side of the world is rearing its ugly head. Watch that China peg space.

We have now cut most of our shorts and are reluctantly picking up some oversold stock in the hope that the there will be another relief rally, putting our trading portfolios on a net long stance.

We’ll watch the ministers in Euroland and pray that almost a trillion euros is enough to reignite the rally after a two-week sell-off. Crazy stuff. And to think that £800-million brought down Barings Bank. We live in strange times.

Nick Kunze is the head of dealing at BJM Private Clients

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