/ 27 July 2010

Complacency suggests it’s time to take profits

Last week’s strategy of staying long throughout the earnings season has paid nice dividends, as the JSE All Share continued to track the global markets higher with a 3,25% return last week.

It’s one of the hardest things to do as a trader, letting the longs run as they start getting into overbought territory, but with the momentum this strong, and what appears to be a local short squeeze, this run will probably continue for another few days.

Looking back, the news flow has certainly been positive, with encouraging earnings and robust European data helping to bolster market confidence.

Throw in the positive news that the majority of European Banks passed the stress tests, and you have the recipe for more money to be thrown into equities.

But it has been a tale of two markets, as even though corporate United States has been exemplary, the economic data has been showing signs of slowing.

Locally, with the lack of an interest-rate cut and the rand being the beneficiary of risk and now pushing towards R7,25 on the US dollar, one gets the feeling that after the earnings are out the way, it might be time to put in some downside protection.

I always get a little nervous when the institutions start becoming overly bullish after the market has already run, and that is where we are now. Case in point: institutions are now 75% invested in equities, the most in 18 months.

Also, the volatility index (VIX) is now back at lows not seen since May (22%), which means complacency is coming back on the radar. This week, I’ll start to cut the longs and build some shorts as I think next week, once the noise is out the way, the reality that we are not quite out the woods yet will start to set in.

  • Nick Kunze is head of dealing at BJM Private Clients
  • Traders’ jargon:
    “Long” is when you have bought a share with the expectation of the share price going up.

    “Short” is when you have sold a share you have borrowed with the expectation that the share price will fall and you will buy it at a cheaper price to settle the deal.

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