Yesterday afternoon I was rolling down some retracement brackets on many indexes to try and get a picture of how a hedge fund manager, institutional trader and even individual investors/traders can assess risk in their portfolios.
Current analysis of the QQQ's looks like we are set to test the $29.23 level and perhaps the $22.21 area should things continue to worsen. In last weeks commentary, we took some time and effort to explain some hedge strategies for traders that didn't want to sell their stocks. With few levels past technical support to help guide us, traders are left with our technique of "rolling retracement" to assess the downside potential.
NASDAQ-100 Tracking Stock (QQQ) - last nine months
Market makers were undoubtedly "forced" to create some hedge positions for their inventories on Monday and Tuesday in order to begin protecting them to the $29.23 level. Should we see a break of that level, then I'd expect some further hedge strategies to go into effect to protect against the $22.21 levels.
Keane Inc. (KEA) - last nine months
Shares of Keane (NYSE:KEA) correlate very closely with the QQQ's even though the stock is not a part of that index. However, using retracement we get the feeling that "risk" was hedged on Monday at the $15.64 retracement level to protect against the downside levels of $14.13, $11.70 and $9.28. Any buying of the stock at current levels is willing to take some heat to the $11.70 area. Any shorting/put or hedge strategies is willing to take heat to $15.64. With the breaking of upward trend, equity bulls for KEA will be better served to try and buy the stock as cheap as possible.
Oil Service Index (OSX.X) - last nine months
The fitted retracement bracket on the Oil Service Index (OSX.X) gives hint that there's quite a bit of downside risk in the group of stocks. Earlier this summer OPEC announced it would cut production to try and keep oil prices from falling. Those that understood the laws of supply/demand perhaps felt that a cut in production meant less business for oil service stocks that derive the bulk of their revenue from exploration and production activities. With global economic concerns, energy consumption has dropped off, OPEC has cut production and many oil service stocks have suffered the consequences.
Swiss Franc (Dec. 2001) - last nine months
Last week when equity markets were halted in the US, I began working on some contingency plans regarding other indicators we needed to begin monitoring more closely. One of those "indicators" was how the US$ held up against the Swiss Franc. I laid out the scenario that the Swiss Franc might see gains should some market participants in the US look to "pull out" and move somewhere else. It's an arguable point that the Swiss Franc and perhaps the Swiss government is more "neutral" when it comes to world events. The neutrality then becomes somewhat of a safe haven for investors. With the selling we've seen in U.S. Treasury bonds the past couple of sessions and the continued rise in the Swiss Franc, I'm now beginning to conclude that some assets are being shifted away from US shores.