The equity stock market ends flat from last week. The average trading volume is higher due to more individual investors participating in the market. The increased trading volume is not in favor of a gradual climb of the equity stock but creating oscillation instead. This provides profit making conditions for opportunistic traders.
The article "After a Great September for Stocks, Now What?" analyses the market outlook for the fourth quarter. There are three possible scenario namely, bullish, bearish, and muddle-through respectively. The author finds himself in the last camp. Some of the individual investors previously waiting on the sideline change from pessimistic to a muddle-through scenario and start to participate again with limited trading activities. This results in the increase of trading volume as well as stock price oscillation.
The speculative trading portfolio is holding the stocks which have increased in value. On the other hand, call options expiring in October are sold to realise small profit. Initially they are out of money by 5 to 10% at the time of selling. Now some become in the money for 5 to 10% of value. Thus the growth potential of the stock portfolio is limited but the downside risk exists. However it is believed that the probability of a sharp decline of the equity stock market in this month is small. Some of the stocks in the portfolio may be liquidated to satisfy call option requirement. Although major indices reach year high, many stocks are lagging behind due to various reasons.
The leveraged ETFs holding is changed from neutral to slightly bullish. This enables the portfolio to appreciate in value if the market climbs higher while the gain of stock equity in the portfolio is largely offset by the call options sold. Some gain in the portfolio is achieved by speculative day trading of leveraged ETFs in this market environment. As mentioned in previous post, there are strict rules to be followed for trading to mitigate risk. Leveraged ETFs are mainly used for trading purpose and not suitable for holding for extended time. Despite a subject of much controversy, misinformation, and confusion, leveraged ETFs can be a useful trading engine if managed properly. Five Facts Every Investor Should Know About Leveraged ETFs.
Quarterly earning announcement is approaching. Corporations should be able to maintain revenue and profitability although the growth outlook may not be very promising. However, capital from both individual investors and institutions are seeking opportunity in the asset market of bonds, equity stocks, commodities, and currency. The market is likely range bounded at current level for some time. Also there is likely more oscillation due to increased individual investors participation and earning announcements.
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