Online Stockmarket Trading Update

One of our development teams has been working on our new research product for the past few months and I m pleased to say that this product has finally been launched, with a great effort from everyone involved in getting it out the door.

As existing members of MDS Financial, you either already have access to this report or will shortly receive information on it and how to trial the service.

The Market Analyser development team are working on having a new update released before the end of the year, with a number of feature and bug changes; more information will be provided on that next month, but the current focus is on improving performance.

Tom is the Special Projects Manager for Trader Dealer Online, a subsidiary company of MDS Financial, and the Marketing and Sales Manager for MDS Financial Group.

He has been involved in the finance industry for 7 years and joined the group in July. He previously worked for Citi Smith Barney, Citibank s stockbroking division as a Private Client Advisor. He fully understands the market and holds level 2 derivatives accreditation. Tom also has a degree in commerce with a major in Financial Planning and holds PS146 accreditation.

Tom enjoys the challenges that are placed upon him though managing the Trader Dealer Online business and is taking like a fish to water in his new role as Marketing and Sales Manager for MDS Financial Group. He strives on customer service and satisfaction, by following through with what he promises in a timely fashion.

Outside of work, Tom enjoys sailing down in his hometown Geelong, where he has spent several years racing everything from 12-foot dinghies to 50-foot yachts. He also has a keen interest in not only drinking wine, but also the processes on how it is made.

Living in Port Melbourne is a must for Tom as it is close to the water and not too far from home in Geelong. He is an avid supporter of the Geelong Football Club, and is still struggling to come to terms with the Grand Final of 2008.

The current trading environment is certainly an interesting place and it is times like these where traders with a trading plan, utilising solid techniques and logical strategies survive when others don t. When individual stocks become overly volatile and liquidity becomes an issue, it is often useful to look at trading the whole market or particular sectors within the market. To trade the whole Australian share market, you can gain exposure to the S&P/ASX 200 Index. This index measures the performance of the 200 largest index-eligible stocks listed on the ASX.

A stock’s weight in an index is determined by the float-adjusted market capitalisation of the stock. The float adjustment removes controlling and strategic shareholdings from the market capitalisation calculation to ensure that only the portion of the company’s float that is truly available to investors is included in the index calculation. Also, stocks in the index must have enough trading activity to meet certain liquidity thresholds to ensure that funds tracking the index can buy and sell index constituents relatively easily.

A number of strategies can be applied revolving around the index and combining individual stocks or market sectors within it.

Using Contracts for Difference (CFDs), a trader can gain leveraged exposure to the Australian 200 index by trading the Australia 200 Cash Contract. Despite the shorting ban, traders are still able to short sell this contract utilising a number of effective strategies.

Hedging

The Australia 200 cash contract is a quick, cheap and efficient way to hedge an existing share portfolio in times of market volatility.

Example;

Let s presume an investor held a balanced share portfolio valued at $250,000 on the 30th October. The index was trading around 4500. To cover a $250,000 balanced share portfolio, the trader could have short sold two (2) Australia 200 cash contracts. This would have a face value of $225,000, so although not a perfect hedge, it provides protection. Since then the index has dropped to 3900, some 600 points. The trader s share portfolio would have suffered a loss while the short position on the index would have generated a profit of $30,000. The capital requirement to take the short positions would have been $10,000.

This is designed to be a market neutral strategy. Alternatively, if you just wanted to reduce a proportion of your exposure in the market, you could short the index to an equivalent of 50% of your share exposure.

Moving forward, the recent low set in October may be another level to watch. A break of this may see a further move the 3500 level. To protect your portfolio you may want to hedge your position should the index fall below 3700, with the view that the index could fall another 200 points before finding support.

Index Tilting

This strategy can be applied when a trader has a bias towards a particular sector or area within a market. For instance, if the trader believes that the Australian market is oversold, they can buy the entire market through an index CFD. If the trader is more bullish on the materials sector for instance, they can buy an additional contract in the materials sector effectively tilting the index towards materials.

Index/sector stripping

Index stripping builds on the idea presented above and can be applied when you have the belief that the index will rise but a particular sector or sectors within the index will under perform the broader market. The trader buys the Australian 200 index and may sell the Health Care sector for instance. This strategy can be applied to individual shares within a sector as well, for example if you are bullish on the consumer discretionary sector but feel that Pacific Brands is an over valued stock with little potential in the near term. You can buy the sector and short Pacific Brands.

A bear market like this presents many opportunities, the most significant of which is the impetus to look at alternate strategies, to learn new techniques and improve your knowledge in the markets. In a bear market it is important to have at least some protection on the downside This will enhances performance over the long term, despite the short term pain that you may be experiencing.

*Please note that the strategies outlined above have not been explained in detail and do require a certain amount of experience or assistance.

To discuss these and other index trading strategies, contact James Gerrish on (02) 9300 3508

Last month we referred to Fear and Greed ruling traders emotions. The fear gauge that we used was the Volatility Index (VIX).

The VIX gauge is still at historic highs, which is understandable as the VIX measures market expectations of near term volatility conveyed by stock index option prices. We postulated that if history repeats then we may well be coming close to a market low.

The trigger(s) we suggested investors should look for to confirm a bottom?

a) A 3-day, then weekly, then monthly close above the previous relative high.
The DOW JONES has not seen 3 consecutive days of higher closing highs since August; and our market only saw it once during that time.

b) The 9, 21 and 50 days moving averages turning up.
We have seen the 9 day moving average turn, but have not had confirmation from the 21 and 50 day moving averages.

c) Overseas markets settling.
This has NOT happened in any of the overseas markets as yet. Though most of the markets have not traded below their October lows, and are trying to swing higher.

d) Positive response to the implementation of the $700 billion TARP package.
The response has been generally positive, however the devil is in the detail and the implementation of the package is not going to happen overnight.

e) Positive impetus from the coordinated global rate cuts.
We have had a further set of global rate cuts this month. The markets appear to react positively initially then revert back to the trend. The underlying issue here is the freezing of inter bank lending. This market is slowly thawing, however again this takes time.

f) Positive response to removal of the Shorting Bans.
Well the Bans were extended in Australia to: 22 Nov 08 for non financials and until 28 Jan 08 for financials. This ban has obviously had little impact to the bearish sentiment surrounding the markets as they continue to slide.

Fear is still well and truly priced into the market as measured by the Volatility Index (VIX) see the attached chart. However the VIX is retracing from its spike in late October, as the markets digest all the schemes being implemented by the central banks of the world as they endeavour the restore confidence to the markets.The action plan is to keep an eye on the triggers discussed earlier and to act once those conditions indicate a change in sentiment.

Fear is still well and truly priced into the market as measured by the Volatility Index (VIX) see the attached chart. However the VIX is retracing from its spike in late October, as the markets digest all the schemes being implemented by the central banks of the world as they endeavour the restore confidence to the markets.The action plan is to keep an eye on the triggers discussed earlier and to act once those conditions indicate a change in sentiment. Aussie Battlers Doing It Tough

The Australian stock market has given back fives years of hard fought gains in just over twelve months, as can be seen on this chart. The slowing world economic growth has fuelled selling across the board and respite looks a long way off. However, if the market can find support at these levels, we may see a bear market rally late in the year. We have drawn a 5 month moving average on this chart which illustrates clearly that we are still in a bear market (and that 3400 is a key level for the ASX 200 index, this level acted as resistance back in 2002 and 2004).

The market is looking for support at current levels, however it is very much hostage to what happens overseas. The central banks of the world are undertaking a co-ordinated effort to reduce interest rates and pump in liquidity into their various markets. Key here is: the US Government TARP rescue plan; and the recently initiated Chinese stimulus package; these impact the key economies fuelling the world economic growth engine.

It is worth noting that historically market lows are often formed in the later part of October and generally the best six months of the year to be invested are November through to April. This upward bias from November through April, combined with a market bottom may provide traders with a profitable opportunity for a bear market rally into the later part of this year.