OPENING POSITION
February 2002
The recent bankruptcy filing of Enron Corp.
(ENE) gave us a not-so-gentle reminder that all investments are risky,
whether or not they are with fundamentally sound companies. For a long
time the risk has been focused on the dotcom companies, but it's evident
that this risk isn't limited to earnings. Here's a company that actually
had earnings (fundamentally sound ones), was viewed favorably among analysts,
held by top institutions and mutual funds, was a Fortune 500 company,
and was a component of the Standard & Poor's 500 index. Although ENE
met the fundamental criteria for being a low-risk investment, it still
proved to be one that had a negative impact for the investor.
The company's sudden decline affected more than just the price of its
stock. As a component of the Dow Jones Utility Average (DJUA), ENE also
acted as a catalyst in bringing that index down to its yearly low. And
it is this drop in the DJUA that could have some serious repercussions
in the broader markets. Historically, the performance of the interest rate-sensitive
utilities has led to turns in the broader markets. The average lead-time
has been three months. If this pattern holds, it suggests that the broader
markets have still not reached their lows. Let's hope this time is an exception,
but regardless, it just goes to show that risk management is an important
concept for anyone involved in the markets.
To hedge your positions from the volatility
of the markets, you should take advantage of risk management strategies
and make use of various derivatives, the most popular being options. In
this, the February 2002 issue of Technical Analysis of STOCKS &
COMMODITIES, we bring these topics to the surface. Luis Ballescá-Loyo's
"Optimizing Portfolios Using Value At Risk" discusses techniques
you can use to select stocks in such a way that your overall risk is reduced.
His article begins on page 18. And in our interview this month, which begins
on page 48, options expert Larry McMillan discusses trading options volatilities,
a technique that can be used to prevent your portfolio returns from swinging
wildly.
Surprises are bound to happen - in fact, they are inevitable - and it's
always best to be prepared.
Jayanthi Gopalakrishnan,
Editor
Originally published in the February 2002 issue of Technical Analysis
of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright
2002, Technical Analysis, Inc.
