VOLATILITY OF THE MARKETS: AN EXAMPLE

 

By Roland Lee, 22 March, 2008

 

At about 7pm ET Sunday 16 March (Asian time 7am Monday), I sent the following message to those who subscribed to my shortlist for virtual trades:-

“Fed decreased discount rate by 25 basis points on Sunday 16 March. On 18 March expect 75 basis reduction of Fed Fund rate. Expect market this short week to be bullish by the Fed action. Consider Calls this week for GME and QLGC. Also monitor Calls for GS and MS due to Fed action.”

On the same morning at 10pm ET Sunday 16 March (Asian time 10am Monday), after I read news of massive concerns in the Asian markets, I sent a second message following the opening of Asian markets:-

“The Asian markets are down. Concerned that Bear Stearns bailout could mean more problems in banks. US markets expected to open down on Monday. So be careful this week. Can be volatile.”

For readers familiar with the US markets, the market on Monday 17 March, 2008 was indeed volatile. The Dow was down 193 points by midday and the Nasdaq and S&P 500 were also in the negative. At the close of the market the Dow recovered and closed with a positive 21 points whilst the other two indices remained in the red. Bear Stearns, the venerable US investment bank, was sold at an unexpected price of $2.00 per share to JP Morgan Chase. This led Bear Stearns to close on Monday at $4.81, a drop of 25% off last week’s close.

At Monday’s close, Goldman Sachs (GS) and Morgan Stanley (MS), closed at $151.02 and $36.38 respectively.

Guess what happened on Tuesday 18 March, 2008 after the Fed announced a 75 basis point reduction to the interests rates? The market soared to a record, with the Dow closing at 412 points. My shortlist performed very well. GS closed at $175.59 (up 16.27%), MS closed at $42.86 (up 17.81%), GME closed at $48.55 (up 3.30%), and QLGC closed at $16.25 (up 3.44%).

Being a short week as there were no trading on Good Friday, the markets closed up on Thursday 20 March, 2008. The Dow was up 262 points, the Nasdaq up 48 points, and the S&P 500 up 31 points. My shortlist closed with three of the shortlist performing well, namely, GS closed up at $179.63, MS closed up at $49.67, and GME closed up at $50.18. The volatility of the market saw my last shortlist, QLGC closing down at $15.12.

The markets are indeed volatile! For the less weary investor, it can be costly. A way to mitigate the potential of losses due to such volatility will be for the investor to be equipped with the correct knowledge and skills to handle investments or trading in the stockmarkets. Note however that such knowledge and skill does not completely mitigate an investor from losses because systematic risks that are difficult to foresee can indeed swamp the best of forecasts.

What good investment and trading courses will do for the investor is to make the person more aware of the potential traps the market can present. Afterall, winning in the markets is always a game of odds. You just need to give yourself that higher probability of winning and that’s what a good training course must offer you! Take care.