What Mattered Today; Markets hit hard but they will bounce!

James Gerrish

Another massive day for Aussie stocks and the busiest we’ve had on the desk for a few years courtesy of a big drop in the US market overnight plus we had follow through selling via US Futures today while Asia was a sea of red – the Nikkei off 5%, stocks down 3.35% in Hong Kong, while they fell 3.1% in China – our mkt almost felt okay compared to elsewhere however a day where the mkt falls ~3% is always going to rattle the cage! US Futures at their worst were down ~3.51% during our session however as I tap away they’ve recovered strongly and are now down 0.56% at 5.38pm - a strong recovery from the lows and a decent lead in to tonight’s session however as we saw today / last night, selling can become self-perpetuating as weak equity longs – leveraged positions and global funds around the world are forced to unwind their short volatility positions.

News today that Credit Suisse was taking a massive bath on a fund that shorted volatility rocked the market during our session and was probably the main catalyst for the uptick in scale and aggression of Futures led selling in the States. Anyway, the simple take away from this theme is that the greater the level of complacency on the way up the more violent the sell-off is when it finally comes. While we’ve been ‘cautious’ the US market for some time prompting us to maintain high cash levels in our portfolio’s, there’s no real escape for such a savage sell-off that has transpired over the last few sessions. From an investment standpoint, we hold cash to ensure flexibility which allows us to buy market weakness / panic when it unfolds. We bought 4 stocks today in the Platinum Portfolio and 1 stock in the Income Portfolio which I’ll cover later, however at this stage the buying / levels we were filled feel reasonable. While no-one knows where this selloff will finish, buying on the back foot as stocks come down to our targeted levels makes sense to us.

Interestingly, we had targets on the stocks we picked up today that a few weeks ago looked very optimistic, however the market has a tendency to move sharply, and the patient can be rewarded. A few things to look at that gives me some comfort here./ Credit spreads aren’t widening (much), day 1 of the sell-off in the US was just that, indiscriminate selling, while day two was simply a movement of funds from equities back into bonds – which suggests rotation rather capitulation. Margin positions in the states are high, cash was low and the mkt was simply too bullish. The fact money moved from equities to bonds and not simply to the sidelines overnight is a reasonable sign.

Our bearish downside target for the ASX 200 was the 5900/5950 range, and today the market punched through that courtesy of US Futures with the market closing down -192pts or -3.20% at 5833 – so clearly our downside targets have been hit and exceeded – however for now, we still view these levels as an opportunity rather than a time to panic, with the caveat that we’ll obviously be watching overseas trade tonight with interest. In terms of the S&P 500, our downside target is satisfied and we’re now looking for the market to find support around current levels – probably after trading lower on open tonight.

In terms of our portfolio’s today, the Platinum Portfolio was weak losing 2.80% but better than to overall market while the Income Portfolio showed its defensive qualities, down around 1.7%, or about half the markets drop. We’re comfortable with our positioning in both. Watch out for the AM report tomorrow as we expand our thoughts further.

S&P 500 Daily Chart

ASX 200 Intra-Day Chart

ASX 200 Daily Chart

REPORTING – a BIG day tomorrow with CBA, GMA & RIO

James & the Market Matters Team

The above is an extract from the Market Matters Afternoon Report. To gain access to all reports for the next 14 days, including our picks into the market drop, CLICK HERE

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James Gerrish

James is a Portfolio Manager within Shaw and Partners heading up a team that manages direct equity and option portfolios. He is also the Primary Contributor to Market Matters, a daily investment report that offers real market insight.

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