We`re just about to enter into the third quarter of 2002 and many investors are weighing up their investment strategies for the quarter - which like many before may bring about extreme volatility stemming from a myriad of geo-political, macro-economic and industry pressures. Whether to be sidelined in cash products, long or short markets, the lessons of this era point toward another distinct tactic - market neutral or relative value trading.
It is an investment approach that can be as aggressive as being long or short the market, or it can be as conservative as being sidelined in a cash investment. This approach coincides with a new level of market sophistication and technology that allows private investors to take aggressive market neutral strategies, with the use of derivative products such as Spread Trading or Futures Trading. This allows investors to take long-term simultaneous "buy" and short "sell" positions in different products.
A market neutral strategy or relative value trading is often the way Hedge Funds trade and it involves buying one market and selling another - taking advantage of inefficiencies in the valuations of different markets while not being exposed to the absolute levels of the market. The lessons for this strategy are learnt from the Bull markets of the 1990s.
During the 1990`s there were very few negative quarters. Markets grew exponentially and the old maxim of `Sell in May and go away` was left for the technology sceptics. During those bull market times there was only one winning strategy - buy and hold, and leverage or borrow money to buy more. Margin trading grew to stratospheric levels. There was a revolution in the way markets started to value new age `technology` companies and the old style conglomerates. Technology companies grew and took with them the industrial giants as if they were secondary industries. This phenomenon reached a plateau when the seven year old AOL was the senior partner in its merger with media giant Time Warner.
Since the end of the Bull market in late 2000, at the back of many investors` minds is the Japanese experience where the benchmark Nikkei Index saw a lifetime high in December 1989 at 38 915. It currently trades, thirteen years later, around 10 400.
However in South Africa and the Western markets, the end of the Bull market did not coincide with a sharp economic downturn.
It came when companies with proven and sound track records started making back ground on those with mere so-called "potential", allowing the market to have a softer landing. Although the benchmark U.S. equity Index - the Dow Jones, is trading at similar levels to three years ago, the price belies intra-quarter volatility which has seen the Index trade as high as 11 600 and as low as 8 000.
Volatility of this sort scares away legitimate investment where timing becomes more crucial, than underlying fundamental value. A buy and hold strategy based on fundamental analysis of a company or industry is the most widely accepted low risk investment, yet the experience of the last three years would have had a very mixed result, depending on where in the volatility cycle the investment was bought.
Using derivative products such as Contacts-for-Differences offered by Spread Trading company Global Trader 247, investors are able to firstly short sell stocks and secondly trade on margins - therefore leveraging their investment. The facility to short sell affords investors the ability to buy one market and sell another, therefore allowing one the benefit of being able to maintain a market neutral strategy in times of general world uncertainty. This concept of hedging is becoming more widely available with "market neutral" funds being marketed directly to retail investors.
Says Global Trader 247`s Charles Savage, Operations and Technology Director: "Trading different assets or markets against each other can only be achieved by being able to short products. The benefit of doing so increases with only having to deposit a small initial margin in order to trade. One of these strategies taken by many of our investors for example, is to trade Didata versus Datatec; 'buying` (or going long) Didata and 'selling` (or going short) Datatec. In this case only the relative movement of these two stocks against each other is what counts, not the absolute change in the market level.
"Another example is trading the banks against each other - Firstrand versus Investec and Absa etc. Cross market trading is also a very interesting and popular strategy - investors like to trade London versus New York or the high tech Nasdaq versus old style industrial giants in the Dow Jones."
Continues Savage: "Obviously trading on margin means that you are leveraged and therefore you risk more. Global Trader 247`s system installs the necessary discipline needed for trading in derivatives. Every trade needs to have a stop loss; you cannot trade with Global Trader 247 without one. This means that if a strategy is wrong, investors are closed out and losses are normally limited, at worst, to the margin allocated to the trade.
Global Trader 247 also promotes the use of `take profits`- when you enter a strategy, decide what your target profit is and then let the system close you out automatically when you reach that target."
Global Trader 247 also provides live Reuters news reports and customised alerts, which inform their Investors of major economic data releases or key price levels so that they are empowered to make informed investment decisions.
Investors wishing to experiment with Spread Trading are advised to learn as much about the concept as possible, and ideally should have some sort of trading experience. Global Trader 247 also offers a free 'simulated` trading environment wherein Investors can get a taste for Spread Trading in a real-time simulated environment.
In summary, the third quarter is traditionally a poor period for world markets. Combining this with the uncertainty of the current global environment suggests that outright directional trading is a difficult strategy to pursue. Market neutral strategies suggested above, such as long one bank stock versus short another, or long one stock index such as the Dow, versus short another stock index like the FTSE, is one way of overcoming and insulating the trader from many of these external random shocks, whilst at the same time allowing traders to "stock pick". Spread Trading with Global Trader 247 is a very efficient and cost effective way of employing these strategies.
For more information on Spread Trading, call the Global Trader 247 help desk on 011 520 9010.
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