Wednesday, May 5, 2010

Time to buy some Rocks?

Is this is a correction (10%) or a larger downswing(10-20%)?

The past few trading sessions saw some rapid declines, although they were met with some resistence from the 'dip buyers'. Each down day was followed by a convictionless rebound that didn't take out the prior day's high price.

Given the market has taken off about 5% from the sp500 and even more from the asx200, if it's a correction; the time to start buying would be now.

Right now the sentiment is turning very bearish, but the past few months has seen this sentiment come and go in a matter of days, and possibly a continuation of liquidity in the States might push the market higher again.

The best plays in the meantime are, AuS resources (bhp/fmg/sto/bsl) - I don't give a sh1t about this henry tax because it's not as big a deal as people are playing it out to be. Bunch of girls just acting like their boyfriends haven't called them for ONE day. The over-reaction is two fold, the effects aren't for 2 years, and there's so much political pressure AGAINST it, that it may be rejected. (quick rant: regulating wallstreet in the US is definitely granted given the excesses and the instability that bankers caused, but punishing the mining companies in a scenario where they SAVED the aussie economy is totally devoid of reason; why would you hurt the industry where you are globally competitve?). The 3 main risk factors of price, fundamentals are balance sheet risk are all covered: price is at a multi month low in an uptrend, the p/e are still rising with commodity prices likely to remain stable with the falling demand offset by inflationary concerns, and balance sheets strong due to cap raisings during the march meltdown last year.

The second best play is long AUD - as long as AUD has a rising curve, it's downwards movements due to flows away from risk are likely to be stalled at some point. Can't give you exact entry prices as I'm no quant, but 90c seems to be a nice back of the envelope mark.

If you're scared to pick up the resources without some rubber, then let's short some banks to ride the current downswing (cba, wbc, nab).
I think getting about 65% longs and 35% short would be decent, with a complete 100% allocation to stocks if the market falls by 20-25%. About 1000 on the sp500, and 4450 on the asx200.

Gold continues to remain strong, and this indicates the bullish appetite, although the main flows are due to sovereign risks.


short some banks, then - if market falls to 200MA on banks, cover (this is the insurance for buy list)

shopping list, buy in MAY, and go AWAY (for 3 years?)


So assuming you have a spare 10k to invest for 3 years (preferably 20k) do the following

20% bhp (resources) @36.95 (2k)
30% fmg (resources) @ 12.60 (3k)
20% bsl (steel) @ 2.44 (2k)
15% sto (gas) @ 11.22 (1.5k)
15% wpl @ 44.15 (oil) or NCM @ 28.70 (1.5k)

If you want to juice up your returns get another 20%(leverage your account to 120%) into SBM (gold) @ 21c

disclaimer: please don't believe a word I write about stocks, your drinking buddy probably has a better shot at picking the market than I do.