Weekly game plan 22 March 2020

First and foremost, we want to encourage everyone reading this to take social distancing seriously. In fact, we will go as far as saying that we should all take the coming lockdown very seriously as we believe this is almost inevitable now. We as a nation have one chance to prevent this virus from spreading to the rural areas and townships. We must work with government to abide by the guidelines, stay out of public and prevent the further spread of this virus. The frank reality here is that the hospitals will not cope if we see the infection spread as fast as it has in other countries. We don’t mean to fearmonger, but South Africa has a very large number of people with compromised immune systems due to the high rate of HIV, AIDS and TB infections among our countryman. The potential for catastrophe… the pressure on the hospitals… we have to all, every one of us, do whatever we can to help the doctors and nurses and other medical professionals and volunteers who are about to put their lives on the line to fight this thing. Stay at home. Donate your hoarded masks and gloves to your nearest hospital, they need it more than you.

The world will not be the same after this. The global economy is basically shutting down in stages for around two months at a time. China went first, Europe, America and the rest of the world go now. This has the potential to either crush, or be the rise of small business. We want to keep an opportunistic outlook and thus we are letting our minds explore the possibilities of a ‘work-from-home’ economy. We are seeing a few things first hand; 1. the impact that humans have on the environment – just a few weeks of factories being shut and zero traffic in some places and we can see how nature is bouncing back, 2. we are testing the ‘work-from-home’ economy on a global scale for the first time – honestly we’ll not be surprised if we see productivity per capita go up during this time, 3. the importance of the cell phone in daily life is about to increase by orders of magnitude – it is becoming the only way to communicate, work and play… we’re about to see some of the most creative technologically driven innovations in recent history.

As for trading; for now we are being very, very careful. Most of last week we hardly traded any swing-CFD positions and we expect that it will be the same in the coming week. We will not entirely sit out the week, but we will be very selective with our trades. Risk management is absolute. We will not take risks we do not deem worth the reward. We’ve said this a few times, but it is hard to seperate rumour from fact. The JSE announced that it will keep the market open and will maintain normal operating hours, although it also said that it is looking to limit naked short selling. From a risk management perspective, we cannot justify the risk of being caught short on a CFD or Futures position and getting ripped apart by a stock recall, or potentially even be stuck in short positions during a market closure that lasts weeks. We don’t know if the JSE will stay open if the entire country is placed on lockdown, nor do we know how deep this crash will end up being. We do know though that during the first two weeks of the crash we’d made some money and that the safest thing to do now is to wait for the volatility to die down before getting involved again. Yes, fortunes will be made in this, but also, for every winner there is a loser (unless you trade OTC derivatives with a market maker, then the only winner is the house). It’s just not worth the risk. The money will be made coming out of this and therefore we need to ensure that we have money left when this is all over. If you are not a trader and you are considering getting into trading now, our advice is to buy shares and ETFs with a long-term outlook. Don’t try to be a hero. Now, as is ever the case, participating in financial markets is about survival and only taking risk when the chances of success is firmly in our favour. There is no mad rush to open trading accounts and start leveraging up on forex trades. That is madness and will end in tears for 99% of people. Rather take that money, speak to an advisor and invest it in something you believe in.

So ok, we got some things off our chest there. Let’s look at opportunities that we think make sense given the current state of the world.

S&P500

We’ve seen a few charts of the SPX looking for a large Head and Shoulders pattern to form here, which would require a bounce to above the 2700 level before making the next leg down. We’re not so sure that we’ll see that bounce. The way we see it is that we’ve had a weekly close below a key support level and all indications are that the market will open lower on Monday. To us, this creates a high risk-reward trade to the support level created by highs of 2007.

Medtronic

Full disclosure, this is bottom picking at it’s finest. Well, maybe ‘finest’ is not the right word… maybe ‘riskiest’ is a better word. This is in fact a trade that we have already had one failed attempt on (we had a call option that expired on Thursday). MDC makes medical ventilators, which are in extreme short supply globally. We think there is a good chance that this stock will do well in the coming months so we will be looking to buy again in the coming week (note that this stock is listed in the U.S.).

USD/ZAR

We’ve changed our USD/ZAR chart from the daily timeframe to the weekly timeframe to help us keep perspective. At this stage it looks like it’s pretty much a given that the Rand will hit R18.44 to the Dollar. Our questions is now; where to from there? As is the case with the S&P500 and our local market, we don’t think that we’ve seen the point of maximum panic yet. Our expectation is for the USD/ZAR to breach that R18.44 level this week and probably settle somewhere comfortably above it by the end of the week.

Thinking long-term

We posted some offshore ETFs that we bought last week on the International outlook blog with a long-term outlook. For now there is not much more to do except wait for another chance to deploy the second and third tranches of capital. There is a local investment that we made last week as well, which is detailed below.

Again, we want to caution traders and investors and very clearly advise them to not over trade at this time. Be patient, the opportunities will come. You are welcome to open trading and investment accounts at this time, but please do not rush out and buy fallen angels or geared currency positions. Be careful, be patient and be prepared. Herenya has a wide variety of trading accounts that are likely more competitively priced than most other providers. Feel free to have a look at our offering and open accounts, but be warned, we will not allow new account holders to take wild speculative bets during this time. It is our responsibility to protect our clients and ensure that they make it out the other side of this. We take that responsibility very seriously.

NewFunds ILBI

The NewFunds ILBI ETF tracks the Inflation Linked Bond Index in South Africa. The price of this ETF was hammered last week due to recent moves in bond prices. For a long-term investor, we feel that it offers a great entry point around the levels at which it is trading now. This is not something that is going to create a ton of capital growth, but rather a vehicle in which an investor can earn inflation +1% on their capital. Interest earned on the underlying bonds in this EFT is reinvested over time and thus results in capital growth (as mentioned before, not massive, but inflation +1%). We like this ETF (and other Bond ETFs) as it is providing an attractive entry point in our opinion, as well as, lowers the volatility of the long-term portfolio we are building during this downturn.

*Please note that these trade ideas form part of a larger weekly plan and the value of financial products can increase as well as decrease over time, depending on the value of the underlying securities and market conditions. The risk of loss arising from trading in Contracts for Difference can be substantial. You should carefully consider whether such investments are suitable for you in the light of your circumstances and financial resources.

Leave a Comment

Scroll to Top

We'll help the right account.

Please give us your contact details so that we can call you and help you choose the most suited trading account for your individual requirements.

Your message is on its way to us!

We will be in touch with you shortly.

In the meantime, check out our other pages with the drop down below:

We really appreciate you reaching out. We will be in touch with you within two business days.