Uptrend Channel Break This is obviously a Technical Analysis type Sell Signal. Occasionally (but not very often really) if I have a Stock that has done very well and been Trending very strongly upwards in a very well defined ‘Channel’, then if it breaks the Bottom Line of the Channel to the downside, then I might Sell the Stock. Obviously if it is a Stock that I really like from a Fundamentals viewpoint, then I might hang on to it and ride out the Technical pressures, but if I am less wedded to the Stock, then I will dump it. Some people use these kind of Indicators all the time in their Investing - but this is more a Trading approach really - and as Regular (long suffering more like) Readers will know, I tend to use Fundamentals to pick my Stocks and Technicals to time my Buys and Sells. Summers coming…….
Yeah right, if only, we can dream……Well, the point of this is that I try to get in the habit of selling Stocks in the Spring Rallies so that I am carrying less Exposure into the dull and often sideways Summer months. As ever, sounds great in theory, but this year (2014) I do not feel I sold enough stuff just before Summer - I did a fair bit but really it would be best to perhaps do as much as 30% of my Long Exposure. I am a Great Believer in these sort of ‘Seasonal Investing Trends’ and it is almost surprising how well it works and how few people take advantage of this well-established trend. In simple terms, Summer tends to be pants and Winter is wicked - as the old adage goes “Sell in May and go away, and don’t come back until St Ledger Day…….” Again, there is a decision to be made with regard to whether or not to sell Whole Positions of certain Stocks or to just Topslice. However, this is nuance really - the point is that it really makes sense to lighten up prior to Summer. This could be even more important going into 2015. The General Election will be May 7th (I think that was the date) and has the potential to be the most unpredictable for half a century or more. There is a strong likelihood of a Coalition again but there are a couple of likely combinations - Labour with Scot Nats, Conservatives with Kippers and a small chance that LibDumbs might scrape together enough MPs to be involved somehow. Even the Greens and Ulster Democrats could hold the Balance of Power. Markets generally hate uncertainty, so this could really cause falls and volatility at precisely the time of year when this happens normally anyway. It is likely that the period between the General Election result and the actual formation of a Coalition could be quite long. With the current Coalition, there was an imperative to get a deal done and form a government, because there was a lot of fear that the Bond Market could get jittery and a Sterling Crisis could happen. Chances are that this time there will be less pressure from these markets and Coalition-forming talks could drag on for MONTHS - although that is unclear in reality. So we could see some pronounced swings I suspect. It would not be a bright idea to carry Big Long Exposure Risk into this period. Please do me a huge favour and keep nudging me to start selling down my Stocks by March at the latest - many thanks. Hedging One alternative to selling individual Stock holdings is of course to ‘Hedge’ using an appropriate instrument on the FTSE100 or other Index to Short. I often take this approach - in fact, as you may have noticed, I have just closed all my FTSE100 Short Spreadbets as I think the overall Markets have bottomed out now and we are on the verge of a good Santa Rally. However, if the market keeps heading upwards for the rest of December 2014, then a fall in January 2015 is almost guaranteed and I would be thinking about Shorting again if and when we get to this point. Hedging can work really well for Short Term Events when you do not want to sell any of your Stocks - or you may have sold a few but you feel that you want to keep the rest. An Index Short might avoid having the inconvenience (and cost) of Selling and then having to Buy back good Stocks. For instance, this would have been a possible trade in the lead up to the Scottish Referendum Vote earlier this year. The simple logic is that when Markets seem toppy, or you fear a particular Huge Event such as a General Election or like the Greek Elections a few years ago, you perhaps should Sell some stocks and get your Long Exposure down to reduce Risk. However, you might sell a few things, or none at all, because you like your Current Holdings. So, a great solution to this is to ‘Hedge’ using a Short Position on something like the FTSE100 - I have sometimes used a Short on the FTSE250 or even on the US Indexes - but I tend to stick to the FTSE100 because it is so in our faces all the time. Apologies for repeating myself a lot there - but it is important you understand how this would work. I think it is a great skill to master as a Long Term Investor. If you can crack the art, then the Total Value of your Portfolio could in theory, produce a Chart over time like a Staircase. In good markets when you are unhedged, your Total Value would go up nicely and when times are tough, your Hedges would mean your Portfolio only drops a bit and then you take Hedges off and you are exposed to the next flurry of Gains and the ‘Total Value to time Chart’ would go up again and then you would Hedge on peaks and get a slight drawdown again and so on - I hope this makes sense, I am not sure it does !! Just keep thinking ‘Staircase’……… Right, assuming you have now got your Shorts on, the idea is that you have now reduced your Overall Exposure to the Markets. For example, say you Hedge 30% of your Long Exposure by taking out a FTSE100 Short equivalent to this value. This means that instead of having 100% of your Portfolio Money at Risk, you only now have 70%. The way it works is that if the Markets rise, then your Long Stock Holdings will go up in value and your FTSE100 Short will go down in value. So the Longs and Shorts balance one another and save you from the Risk Event. The opposite is also true, if the market falls as you anticipate, then your FTSE100 Short will gain and your Long Stock Holdings will fall in value. So you have Hedged 30% of your Portfolio. In practice I find that it takes some playing around with to get to a Level of Hedging (with regard to the % of your Portfolio you Hedge) that works well and you are happy with. The best approach I suggest is to start small with your Hedges to see how it goes and to understand it, and gradually do larger Hedges as you get the hang of it over the years. It is quite an Art Form to get it right. I often get it very wrong. Hedging is in no way cost free and you can get hit for Interest Charges on Spreadbets and CFDs (Contracts for Difference) which is a pain - just make sure you are fully aware of the costs of any Hedges. Alternatives to using Spreadbets or CFDs can be to use Exchange Traded Funds (ETFs). I have used a thing called XUKS in the past, which is a Short Trade on the FTSE100 which you buy like a Share - but it works opposite to the FTSE100 - i.e. if the FTSE100 rises 3%, then your XUKS position would lose 3% etc. However, a word of caution - I do not recommend you use the Geared Products of this ilk - for example XUK2 or I think there is a XUK3 - they are very dangerous products. There is a quirk in the way they are calculated from one day to the next. It essentially means that if the FTSE100 is really Choppy in a sideways direction for a period, then you will actually lose a lot of money just by the mathematics of how they are created. They are only really useable for maybe 2 to 3 days maximum - I recommend you DO NOT USE THEM AT ALL. If you use XUKS instead of Spreadbets or CFDs, then you need to have Cash. I guess there are a couple of ways you can do this:
One of the beauties of Spreadbets and CFDs is that they are ‘Margined’ products - this means you can use small amounts of Cash to get big exposures - but introduces Risk so you need to know what you are doing. I intend to keep using Hedges to try to boost my overall returns in a theoretically attractive way. As always, I will be reporting all my Trades and you can see how this goes over time and hopefully we can all learn from the experience - however painful it will probably be. Blimey, it’s 1.20am and I need to get this nonsense uploaded to the Website, gotta dash….. Speak soon, wd Oh, Happy Xmas, ho ho ho………..
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