The bounce we had to have…

September 22nd, 2008  by Antony Ganzitti

Closing Data

Dow Jones up 368 @ 11,388	NASDAQ up 74 @ 2,273	Gold down 32 @ 864
Oil up 6.55 @ 104.05	FTSE up 431 @ 5311	Silver down .2 @ 12..47
Copper down 32 @ 6900	Lead up 27 @ 1832	Zinc up 8 @ 1713
Aluminum down 14 @ 2461	Nickel down 635 @ 16215	Tin up 30 @ 17,195

The bounce we had to have…

What started off looking like a normal correction in the market back in November 2007 certainly proved otherwise. Remember back to yester year… the market was soaring, the bulls were raging, and everyone from the local butcher to the taxi driver were making spondoolies, or in layman’s terms CASH! Money was easy, leverage was even easier, and if you weren’t long… you were wrong!

Progress forward 10 months and boy oh boy how things have changed. From an all-time high on the XJO/ASX200 index of 6851 on the 1st November 2007, the market lost nearly 34% or 2324points to reach a low of 4527 last Thursday.

This was a market correction never before seen, by we could almost say, a generation of investors. Look back to 1987 for anything similar, however compare the two and what we have witnessed this year has been a much more orderly sell-down, and not a climaxtype event.

What were once known as blue-chip companies and high-flying CEO’s have been shown no mercy, as the markets path of destruction and ability to somehow show true value ran its course. The likes of Alco Finance, CreditCorp, MFS, Babcock & Brown, ABC Learning, Raptis Group, City Pacific, Centro Properties and Rams Home Loans, have all either gone under or are teetering on the brink of existence. So is this the low??

The reaction we witnessed from 2:20pm last Thursday has certainly been the most positive buying activity of late. A mixture of short-covering, genuine fund buying, and the culmination of margin call portfolio liquidations saw our index recover 277points from the low of 4527 to close the week at 4804. We can also expect a firmer start for our markets this morning on the back of further gains overseas. So is this the low, I am inclined to say yes, at least for this stage of the correction. No one can exactly predict the direction of the market however the culmination of a number of events last week, indicates the selling cycle may well and truly be over. It’s too early to be saying stupid things like ‘the bull market is back’ or ‘XJO back to 6000’. We need to assess how we recover from this sell-down to predict what may be in store for us next. I am not expecting a full-blown recovery where we see the market put on continuous gains. I am preferring a much more controlled type scenario, as the market has a great deal of congestion it needs to get through from all the selling on the way down.

We see the XJO/ASX200 chart below and still note the important support and resistance levels of 4800 and 5150. This is a congestion zone and the midpoint area between 4950 and 5000 is our first observation point on this recovery.

So what do we do?

Well for those of you holdings dogs and underperformers in your portfolios, any strength is an ideal opportunity to move out of these positions. Look for quality shares, and take note of the ones which actually held up well over the last two weeks. You will notice many top 50 stocks which actually had buying support come in over the last couple of months. These are the gems of the market, the ones which fund managers are happy to accumulate and to hold.

Many clients still have exposure to installment warrants which expire between now and the end of the year. Be proactive and look for strength to exit these positions. And of course don’t forget to sell your option premium. Volatility is high and premiums are fantastic.

Clients also please note, we have September options expiry this week. Check your positions and get in contact with your broker. It’s also a time to start looking out to October to see what is on offer. It has been quite common for typical buy-writes to generate at least 5% on option premium alone, not taking into account upside between purchase price and strike.

“BE PROACTIVE, NOT REACTIVE”

Contact your Freeman Fox Stockbroker on 07 3031 9960 or 1800 003 369 Ext 7.

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