Stay Safe, Don’t Trade

Stay Safe, Don’t Play is the caption that Shakti Shankar Patra (shakti.patra@timesgroup) gave to his commentary on the derivatives market on 2010.2008 in the ET Investor’s Guide.

This caption is interesting to me to clearly bring to the notice of investors an example where traders are running away from the market thereby providing bargain offers to investors. Benjamin Graham advises investors to buy when traders are running away from the market. This is a clear example of the possibility that Graham indicated in his book.

Dangers of picking bottoms for traders: Picking a bottom for a trader is risky. Momentum is safer for a trader than a contrary position. The present market is one such where any trader who entered a long position suffered innumerable times. Shakti echoes other technical analysts when he writes all traditional forms of analysis and conventional indicators have become absolutely useless.

Put call ratio was of no use. Analyzing the build-up at various strike prices has become even more redundant. CBOE VIX hit an all time high of 81.17% which means that S&P 500 option contracts are bought or written with an implied expectation that with a 68.2% confidence (one standard deviation interval) a 81.17% move in S&P 500 over the next year. This means S&P 500 can be below 200 or above 1600 in a one year span. In terms of Dow Jones, it translates to 1700 or 15,300.

Shakti says his trading call for the second successive week remains the same – Just stay out of this madness. Don’t trade.

These are interesting times for investors. Fearful times for traders.

Plan and make your investments.