‘Sell in May and go away.’
It’s an old stock market saying. However, it’s mostly an American concept. The weather is warming up as summer approaches, and many traders in the Northern Hemisphere are winding up their portfolios so they can have a less stressful break.
However, this May was carnage…
Look at what happened in the global markets. The ASX 200 is down 8.5% in May, and the Dow Jones Industrial Average lost 6.3%. Not to be forgotten was the Aussie dollar, losing almost 6% and is now at 96.99 US cents. The economic indicator, copper, dropped 12% in the same time. And oil? Well, Brent Crude is down 15% since 1st May.
But there was one trader who prepared for it. Murray Dawes, editor of Slipstream Trader didn’t expect a small drop. He planned and positioned his subscribers for a drastic fall in the stock market…
On the 17th April he told his readers to get ready:
‘The market is now sitting just above some very important technical levels. From here I can see a chain reaction taking the market hundreds of points lower in a short amount of time.’
That was the first time Murray tried to short the stock market. Only to be ‘stopped out’ the next day when the market rallied!
Yet, Dawesy was still sure the stock market was ready to fall. He was sure his strategy was right. Instead of sitting out, he took a small loss, and then got ready for his next attack on the market. Selecting his short sells carefully, he was ready for the next fall.
He wasn’t afraid to get back in. In fact he took another shot at it on the 30th April…
Even after the market rallied when the Reserve Bank of Australia announced a 50 basis point cut, Slipstream Trader subscribers still held onto their short positions. And a good thing too. Since then, the ASX200 has fallen, and then fallen some more.
The ASX200 is now at the same level as December last year. Five months of gains gone in 31 days. The index fell 8.5% in May.
But the thing is, investors should be more accustomed to these wild swings than ever before.
Check out the chart below.
13 times in the past five years, the Aussie index has lost more than 300 points in less than a month.
And how many times did the same thing happen from 2000-2007? Once. September 11, 2001, the stock market was down 300 points in a day.
What does that tell you? Preparing for a severe downturn in the stock market is a necessity today. Sure, this makes investing difficult, but understanding that events like this happen regularly will help you position your portfolio.
Where do you start? Kris Sayce, editor of Australian Small-Cap Investigator has one strategy that he’s been suggesting to readers since last year.
The idea is simple. Allocate most of your portfolio to less risky investments. And keep a little ‘punting money’ aside. Using only a small amount of cash for speculative investments means you’re less likely to hit the panic button and sell exactly at the wrong time.
But sometimes, no matter what, investors panic. So even when you’ve set up a very selective portfolio, it’s hard not to chase the stock market down.
Kris recommends using small-caps for punting money. But if you can devote the time to it, you could allocate some of your punting money to trading…
Murray warned readers of Slipstream Trader not react to the market and dump stocks just because they were taking a beating.
Last week he wrote: ‘…the great bulk of traders are watching the stock market like a hawk now and feeling on edge. That situation usually leads to larger volatility and ultimately trading mistakes if you aren’t careful.’
Selling just because a market is falling will lead to bad investment decisions.
As Murray said of investors who sell in the chaos, ‘Plenty of traders will be long, wrong and sweating on every downtick that the market makes, hoping against hope that it turns back up soon and makes them whole.’
On the last day of April, just before the stock market took a turn for the worse, Murray saw the May market carnage coming:
‘We have a couple of short positions ready to take advantage of [the ASX200] falling back below 4300. Of course, once we fall below that, more selling will come out of the woodwork. But 4200 is the real line in the sand. Anything under there is where the market will get belted. I really do like the set up.’
And as of last night, all Murray’s short trades were ‘in the money’. That’s trader speak for profitable.
Does that mean the stock market looks cheap and you should snap up a few bargains? Not at all. Without any government or central bank interference the chance of a rally to push the index above 4500 is, Murray says, ‘remote’.
If anything, right now it’s better to sit out market and wait for the next opportunity.
Murray’s convinced the Aussie index is moving into a long term downtrend. Meaning he expects the index to move downwards more often than up.
Murray’s been in this game for twenty years. He doesn’t let the markets rattle him. Where other people see a downturn, Murray sees an opportunity.
If you’d like to know where Murray sees the stock market heading click here to learn more.
Shae Smith
Editor, Money Weekend
The Most Important Story This Week…
Money Morning resource expert Dr. Alex Cowie said a while ago that he thought the best opportunities for investors were no longer in the big commodity markets, such as copper and coal. He said the opportunity would be in more “strategic” metals and minerals. These small and largely unknown stories can deliver big gains to investors who get in early before they become widely known. These aren’t something you hear about a lot in the mainstream – until after they deliver percentage returns in the hundreds.
Rare earths are an example from a few years ago. Mineral sands were another one. The good doctor might have just nailed the next one. In his latest issue he recommended a small explorer to take advantage of what might be the big investment story of 2012 – all in a time when the broader market is falling. See what he says himself in The Market Has Crashed, But This Graphite Stock Has More Than Doubled.
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