No excess please, we’re skittish

Volatility, in the form of fast price movements offering potential for quick profits, is what spread-betting companies say their clients prefer. Personally, I hate it. Slow but reliable trends in share prices and markets are my thing. If a profit has to be ground out steadily over months, great, that’s easy on the nerves, and if a loss accumulates slowly, that’s fine, it gives time to exit before serious damage is done.

Volatility, though, cannot be avoided for ever and last week it ran like a rumour through the portfolio. The box with “last week’s change” would have shown a loss of about £500 if the score had been taken on Wednesday morning. By Friday lunchtime, before the American markets began their worst one-day fall for three years, there was a gain of £150 and the life was looking up.

Half of New York’s slide came after London’s close on Friday and so the market here will open down today, probably by at least 1%. It doesn’t sound much but it is likely to mean an instant hit of £300 or more for the portfolio. The real worry is the scope for things to get much worse suddenly. I have no short positions at all and a plan is needed.

In that regard, last week was a useful warm-up. The mild panic in Japan, where the Nikkei fell 6% over two days after a police raid on the iconic internet firm Livedoor, had the predictable effect on the portfolio’s exposure to JP Morgan Fleming Japanese investment trust, which I’m using as a vehicle for a bet on Japan in general. A week ago, this position was showing a profit of £233.

The locals’ reaction to the Livedoor shenanigans struck me as wildly overdone on day one and I expected a bounce-back. The story of economic recovery in Japan from a depressed base (and so offering the possibility of steady, long-term gains) appears intact and Livedoor, just by virtue of its size, does not seem capable of becoming a Japanese Enron or WorldCom.

I thought the same way after the Nikkei’s 3% fall on day two. The brave thing would have been to buy at that point. Instead, I cut the position by almost a third. Wimpish, maybe, but the profit on the position was down to £50 and my golden rule was triggered: don’t let a winning position turn into a losing position. Day three in Japan brought a small recovery but the rule will be applied again if necessary. That may imply buying back the position at a later date at a higher price but so be it.

Mining stocks provided the relief. Rio Tinto, the portfolio’s biggest position, was up 3.5% on Thursday, and Vedanta was even hotter all week. After Japan, it was like being handed a “get out of jail free” card. Should I have played it – in other words, banked some cash? Well, it would have cushioned this morning’s fall. But mining, as I’ve argued here before, is a long-term bet and the only certainty in trying to finesse positions is that you rack up trading costs. That said, expediency demands that at least one of my three mining stocks will have to go if New York’s wobble sets off serious market jitters.

But will it? I liked the comment of Ed Zander, chief executive of Motorola, where almost doubled fourth-quarter profits were greeted with a 7% fall in the share price. “Where I grew up, if you increased sales, profits and market share with cool new products, you were doing pretty well,” said Zander. There were no out-and-out disasters in the US corporate reporting season, just a failure to meet high expectations. Admittedly, markets trade on expectations, so nothing can be taken for granted, but a major rout still looks unlikely.

Still, profits have to be protected and I’m ready to take cash off the table with reluctance. Euromoney and Weir Group were sold last week after enjoying 10% rises (a £140 profit on Euromoney was banked before Christmas, which is why a loss is shown in the table for the rolled-over position). If more selling is required, the batting order might be: 3i and L&G (financial stocks are vulnerable in market corrections), Rolls-Royce (had a good run), SSL (momentum fading), and United Business Media (media can get clobbered in these conditions). Japan and any mining disposal would also slot in somewhere. In the right circumstances, I’d buy any or all back.

Volatility also brings opportunity, of course. I had a stab at PartyGaming last week and came out again as the price drifted but an “up” bet before Friday’s trading statement, with a stop-loss in place, appeals: online poker has not gone away. But the first pick among the possibles is Hunting, an oil services business. The big winner in the US reporting season was Schlumberger, the giant of that industry. Hunting is worth just £400m but should be enjoying the same diet of high oil prices and record levels of exploration by the oil majors. It could be an interesting week.

This entry was posted on Monday, January 23rd, 2006 at 8:42 am and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.