**18/11/10 - 8.48am - by James Gerrish**
Stocks were pretty flat last night with the US market trading in a very tight range. The DOW JONES lost -15 points or -0.14% to close at 11,007. In London the FTSE 100 added +10 points or +0.19% to close at 5692. Locally, the SPI FUTURES are pricing in a drop of -1 point when trading kicks off this morning.
Anyone who has been reading this morning note over the last 6 months will understand my bullish stance on growth in emerging markets. This has been our key investment theme and our positioning in stocks has largely reflected this. Our approach has another two key elements. (See our four point approach -
CLICK HERE)
1. Pay attention to price action: The price of a security or index is the most important element of an investment. Recent trends in price action can tell you a story that is void of personal bias and broker spin
2.
Be active in managing risk: Invest during good times with the knowledge that we can manage risk by using Options/Warrants Contracts in times of greater uncertainty.
The main short fall of many investors is they invest for the good times without having a clear plan if things start to turn lower in the market. At this stage, point 1 above is worth discussion. As it stands, the S&P/ASX 200 (inline with other world markets) has fallen. Its currently trading at 4624.
Price action at the moment is yet to confirm any meaningful drop in the market. If you take a look at the chart of S&P/ASX 200, it becomes clear that short term momentum is heading south, but it also becomes clear that we've seen the market bounce from around 4580 on three other occasions. This suggests that this level is representing solid value in the market and buying support steps in at this level.
If the market does break below this level (4580) on a close basis, I believe this would be meaningful. It would suggest more aggressive downside in equities and those with larger exposures could benefit from a hedging strategy. Its also important to note the markets tendency to get over optimistic and over pessimistic and its frightening how quickly this can change. As mentioned above, if we focus on price action alone, it will go some way to filter out some of the markets noise.
If we do drop below this level 4580ish on a close basis, there are a number of ways we can protect portfolio's. Increase cash is the most obvious, purchase Put Options on individual stocks or the Index as a whole or buy short Index Warrants.
I think it is important however that I do reinforce my investment theme. I still firmly believe in the ability of emerging markets to outpace developed economies and investments will benefit from targeting this phenomenon. Short term market corrections do occur and it’s important that we have a plan for when they do.
We'll discuss Ireland's debt issues tomorrow.
James Gerrish
(02) 9375 0117
