/ 13 July 2010

World Cup is over, let the trades return

As much as the football was awesome, I was actually relieved when I got stuck in traffic on the way to work on Tuesday morning for the first time in a month.

The schools are back, the tourists have started to leave and the second-quarter earnings season kicked off in the United Sates on Monday night. Goodbye June, the month that never traded.

I always said we should have shorted JSE shares and bought SAB! We would actually have made 2,2% if we had done that spread, but hindsight is a wonderful thing.

Alcoa, the biggest US aluminium producer, started the earnings season with profits that topped analyst estimates, sending its shares up as much as 3,5% in extended trading.

A total of 23 companies in the S&P 500, including Google and Citigroup, will post results this week. Profits for the 500 companies in the US are projected to have increased 34% in the April to June period, and then to rise by the same amount in 2010, according to estimates.

Volatility, understandably, is sitting down near its recent lows of 24% and something tells me that the VIX will pick up as the week progresses.

We still have two longs on the books — Lonmin and Sasol. Both continue to edge up nicely, but I want to place some shorts to hedge as earnings seasons always tend to pop up a few surprises.

MTN looks a little pricey up near 110 and Sappi also looks a little overdone near 3250. But the trick is to look for high beta stocks and neither fall into that category.

Trading short-term moves is always the hardest form of trading as opposed to long-term investing, where you have room and time for error. In the long term, equity prices are driven by the economy’s fundamentals, but in the short term, markets are driven by mass psychology.

So trying to make profits by trading is an exercise in second-guessing other humans’ fallibility and emotions. My mum and dad would be so proud, as technically I’m actually a psychiatrist.

I’ll leave you this week with the wise words of Benoit Mandelbrot, the great mathematician who tried to show that modern economics were flawed.

Bubbles and crashes, he said, were the inevitable consequence of the human need to find patterns in the patternless.

Bring on the earnings season …

  • Nick Kunze is head of dealing at BJM Private Client Services
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