Volatility over the next three months … expect a bumpy ride

Connie Queline

Volatility over the next three months … expect a bumpy ride

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SIMON BROWN: I’m chatting with Fred Razak, a chief trading strategist at CMTrading. Fred, I appreciate the time today. South Africa has an election in, well, just over three months’ time. I want to talk around that and traders and long-term investors’ response.

But just as you quickly step back, if we look at it with global eyes the rest of the world is, I suspect, looking at South Africa and probably saying [something like that report card we got as a kid]: ‘Could try harder’, ‘Could do better’.

FRED RAZAK: Absolutely. I think that government sets policy, policy sets mood, mood sets expectations, and expectations set sentiment. It’s all-encompassing. And two of the most important factors are infrastructure and unemployment in South Africa, and foreign investors are looking very carefully what the future will be, because South Africa has immense resources.

SIMON BROWN: Yes. That we absolutely do, in every sense of the word. If we look towards the election – as I said, it’s three months away – we can expect politicians to do what they do best, which is to say lots of wild and crazy things. And then of course there’s a result and maybe there’s a coalition, maybe there isn’t. I don’t know. We are not the political experts here.

But what we can expect is, I imagine, volatility in the market.

FRED RAZAK: Oh, absolutely. Investors are cautious of this type of time. If we go over the Atlantic Ocean, one could just reflect that in 2016, where the US elections were happening between Hillary Clinton and former President Donald Trump, the markets reacted wildly right afterwards. I’ve never seen anything like it.

When things do get to higher intervals – and we’re seeing ourselves in much higher intervals – a percentage of 3 000 points is not that big of a deal. So there’s much more volatility compared to where we were 10 years ago or even 15 years ago on the JSE.

SIMON BROWN: I remember. And in 2016 of course there was the Brexit vote. I remember that as well. Insane volatility. Intuitively I’m saying I’m a trader, I like volatility, but is there perhaps a case for some traders to say: ‘I’d actually sit this out. Let me shut down my computer for a couple of days and let it settle because, if we look at the Brexit vote, if we look at the Trump victory over Clinton, it did settle fairly quickly.’

FRED RAZAK: There are different trading strategies for different marketing conditions. Yes. There are situations where you want really just a very flat line and just very little volatility to take advantage of those types of financial situations.

But then there are the other situations that are much more lucrative, obviously, where the markets show crazy volatility, no rhyme, no reason, over-reaction, emotional trading.

And until we really have another species out there that doesn’t have complacency, that doesn’t have greed and doesn’t have fear in the market, then the markets will trade differently. But until that happens, even the AIs that are being set up are being programmed by humans. So you can’t expect the markets to react in an un-human manner, and it makes total sense.

SIMON BROWN: It does. And that volatility – if someone’s going to trade through it, my sense is firstly don’t bring your own sort of biases and beliefs to it. Follow the price action. If you’re wrong, take the stop-loss quickly. Don’t try and fight the tech; that never works.

FRED RAZAK: Oh, absolutely not. You can’t fight the tech in those types of situations. Get out as soon as possible. I’ve seen people blow up their account numbers and numbers and numbers of times, not setting up pre-planned stop-losses before they enter the market – especially in that type of crazy volatility market. That is the first thing I would tell [someone]. Your best offense is your better defence in those types of situations.

SIMON BROWN: And then it occurs to me – because I said a moment ago maybe actually sit it out – maybe trade it, but perhaps position size is part of the way we manage that risk then.

FRED RAZAK: Yes. Position size, also hedging yourself. That doesn’t mean buying and selling the same underlying asset. It means having two separate assets that work separate ways, meaning if you’re buying gold, you’re selling the Dow. Okay? That’s relatively a correlated stock. The one goes up and the other one goes down. So that’s a strategy.

Like you said, [it’s] just keeping yourself in very minimal amount of size so that you feel that you’ve got a part of the play. But then again, you didn’t overexpose yourself. No one ever cries [about] taking home money. There’s no shame in it. But there is shame about being careless in the markets.

SIMON BROWN: That’s a great point. It’s that carelessness. And the point that you alluded to there is to have that plan, to give it thought. We are three months away. It is to sit down and say, well, I’m going to trade it, but to your point maybe I’m going to look at uncorrelated assets, I’m going to reduce the position size. In other words, go in very prepared. Maybe it isn’t volatile at the end of the day, in which case, well, you’re ready for next time. But be prepared, have that action plan in place.

FRED RAZAK: Absolutely. And you also have to factor in the X factor, which is we’re not prophets, we don’t know what’s going to happen. Could there be an upset? Could there be something else? Could there be a change and people are going to react adversely to it? Could there be the same thing and people are going to react adversely to it?

The scenario is you never know how the street actually reacts to these types of impetuses. So it’s really important to play defensive in these types of circumstances.

SIMON BROWN: I take your point. We are assuming that if X happens, Y happens – and that may be the case but it may not. A long-term investor listening to this is perhaps starting to get a little bit sort of sweaty in the palms of their hand. Truthfully, as a long-term investor short-term volatility [is] less of a concern for you. You’ve got a quality long-term portfolio. You can almost, I want to say, ignore this.

FRED RAZAK: I wouldn’t say ignore it. But even if you do have some cash on the sidelines and you’re looking at a long-term investment, then it might be a great buying opportunity, and that’s doubling into the market when the market sells off just fictitiously or erratically, if you want to call it that, because the trend is upwards.

If we look at most of the indices around the world, people are not into the business of losing money. They’re in the business of making money, and it’s in their best interest to bring returns because otherwise the whole system wouldn’t exist. A basic premise of trading the financial markets is that it’s bias on the upside.

Are there situations where there are sell-offs, there are what we call blood baths and major tankage in the market? Yes. But generally speaking, if you look at the indices around the world, there [is] no upwards momentum. Just yesterday, the Japanese Nikkei was at all-time record highs.

SIMON BROWN: I was going to mention that to you. I don’t know if you were trading in 1989 when it made the previous high. I was aware of markets, but I was writing exams for tertiary. It’s been a long road back for the Nikkei 225.

FRED RAZAK: It has. And it is really propelled by this AI cutting-edge robotic kind of technology that works for Japan. Japan has been in a very difficult space with its economic expansion, because of its stunted population growth, because of its increasing older population and much smaller younger population. They’re experiencing a lot of very interesting scenarios that have never been seen before in history, really.

SIMON BROWN: Yes. And 30 years between all-time highs for an index is, I want to say, unheard of – but there is probably one out there somewhere from, I don’t know, the 1700s or something.

Fred Razak, chief trading strategist, CMTrading, I appreciate the insights.

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