Things just got very interesting

Since my last article on April 22nd the market has largely tracked sideways around the 3660 to 3690 mark, just short of the “magic” 3728 resistance I spoke about.

Last Thursday (30th April 2009) the XAO jumped above this resistance before settling at 3737 on Friday 1st May 2009.  Positive news in the US on the weekend saw the DOW jump up and Australia followed closing at 3846 on Monday 4th May 2009.  Technically this is very positive move and unexpectedly it may indicate that the market is going to break upwards from here.  The 3728 resistance was a strong one and any rally above this point could be sustained.

When price action breaks above a resistance line that line then becomes a potential support.  If this happens it is very significant because our market would have found its bottom.

It’s too early to make this call yet as I would prefer to see the market come back to hit the line and bounce off again but this doesn’t always happen.  The next weak resistance is around 3950 and then we have all the way to 4300 before another resistance point is found.

There are potentially a number of ways to trade this:

1. Buy shares now and hold for a few weeks before writing calls – this would enable you to take advantage of any upside and position yourself for writing when appropriate – remember the “best” way to do the covered call strategy is to write as often as possible.  The risk is if the rally is not sustained the shares will fall in value.
2. Buy shares now and hedge them for 2 to 3 months just in case the rally does not sustain itself – this would enable you to take advantage of any upside and position yourself for writing calls when appropriate and it would also protect you on the downside – this is my favoured strategy at the moment because it would not surprise me if the market falls back to lower levels in the next couple of months.  Really you are getting the “best of both worlds” in this strategy.  Your risk is the cost of the puts to hedge.
3. Buy 2 to 3 month calls and exercise them for stock at expiry or sell for a profit if in the money – a higher risk strategy in that 100% of the funds you put into the calls would be at risk but also, if you use it sensibly, it could be a very low cost way to take advantage of any rally without having to commit to the stock.

Our broking team have suggestions on stocks and options for active traders.  Please call them on 1800 000 369 (Press 7) for advice.

Of course for passive investors now could be a fantastic time to review your strategy.  As a minimum we highly recommend that you have a regular investment plan set up where you contribute a small amount each week, fortnight or month to your investments.  From 6th March 2009 to 4th May 2009 the market (XAO) has risen just under 24% from 3111 to 3846.  If you were making regular contributions during this time you would have gained significant advantage from this move.  The average for the market from November 2008 was around 3450 so your potential gain would have been around 12%.  
 

If you consider this chart from the last “crash” – 1987 to 1997 it tells a very interesting story.  Presuming you had committed all your funds in October 1987 you would have only seen an 18% increase in your funds over ten years.  However if you had invested regularly over the period every month contributing the same amount your portfolio would have increased on average 137% – a VERY powerful argument for a regular investing system.

Remarkably whilst most people are scared of the share market’s volatility and get very sensitive about price movements this is exactly its advantage over other styles of investing – you can buy quality shares at a discount to their real value from time to time.  And this is true with Managed Funds as well.  The last six months may very well have represented the best buying possible for years to come.

Traditionally when the market recovers from falls such as we have seen in the last 2 years, it recovers quickly and most people miss the biggest gains which are to be had because they stay out.

Don’t miss out on the potential upside from here by staying on the sidelines.  All of our GEMs funds allow you to invest from just $100 per month.  Call us on 1800 000 369 to set up your investing plan. 

It will pay investors to take an active strategy in the coming few months as the market is sure to be volatile.  Nothing is certain yet but these are certainly very interesting movements.

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Last time this happened, fortunes were made