/ 19 May 2010

Another case of sell in May and go away?

Last week as mentioned, we decided to flip our short portfolio into a net long in the hope that the eurozone would get its act together and provide a bit of support after the drubbing the euro has been getting in the markets.

No such luck as German Chancellor Angela Merkel decided to open her mouth and banned short sells on the German banks. Of course, this begs the question: “How bad are the German banks if they need protection?”

I’ve been feeling more and more like a currency trader as of late, as my usual trading tools and graphs go out the window and all we do is follow the euro/dollar exchange rate, tick for tick.

When the euro strengthens, the equity indexes all rally, and when the euro weakens, the equity indexes all dump. It’s driving us mad as our little JSE is flapping in the wind at liberty to offshore markets.

Over all it wasn’t such a bad call going long on the market, as the JSE All Share actually managed to edge out a 3% gain on the week, although it felt pretty bad after the “flash crash” on Wall Street last week. There is still a lot of nervousness around at the moment and the rand is very much a loser to all the risk aversion.

As traders retreat and batten down the hatches, they move out of risky high-yielding emerging markets and they move money back into the relative safety of the dollar and sell currencies like the rand.

In fact, the rand has hit a new low for the week against the US dollar, touching 7,76 and looks like it will get weaker as the sentiment in Euroland gets weaker too. Funny enough, this will provide a bit of cushion to our resources as this will benefit the miners and work in favour on the long calls we have made.

The old adage, ‘Sell in May and go away”, looks like it might be the right call, but the month has a while to play out yet. We continue to get hit with bad news and the sentiment, unfortunately, is very low.

The one bit of news that does favour the bulls is that the number of shorts against the euro hit a new all-time high on Friday. When that happens you want to go the other way, so when the euro eventually does turn we should start to get back to normality and the markets will firm.

  • Nick Kunze is the head dealer at BJM Private Client Securities

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