Summer jitters

Since I last optimistically posted about the state of the markets a couple of weeks ago, things have taken a turn for the worse. This has particularly affected the US markets. The media have latched on to the nearest suspect, the prospect of a US trade war, as the most likely culprit. I’m optimistic that a sustained major trade war is unlikely to materialise and I’m still keeping my positive medium term outlook for the markets. However, I don’t think it pays to have too much conviction about such things. While no doubt fears about tariffs are a catalyst, the factors underlying the recent market weakness are likely more complex and could be a legitimate cause for concern.

The market indices have turned down after looking pretty bullish a couple of weeks ago, particularly the Nasdaq and S&P500 in the US. The shares in my watchlist and portfolio have been hit harder than the rest of the market. My portfolio is down almost 4% from its high and most of the shares on my watchlist have also fallen from their highs. Two weeks ago 58 of the 100 companies on my watchlist were within 5% of their highs and 82 were within 10%. Now those figures have fallen to 23 within 5% and 59 within 10%. I don’t attach great significance to these figures – they simply serve to illustrate the extent of buying opportunities across my watchlist as a whole. However, I have taken this shakiness as a cue to add the proceeds of any sales to my cash balance rather than buying any new positions. I’ll buy back in when things are either looking a bit better or a lot worse.

I’ve made three sales. I sold out of Paycom for a 10% profit as its price fell heavily on Monday. My conviction in Paycom has been wavering for some time, from a combination of its high valuation, a recent trading update that was only in-line with expectations, a recent increase in price volatility and several bursts of high volume selling. Microgen has gone, disappointingly soon after I bought it. The price fell more than 10% of my purchase price so I sold, no questions asked. Estée Lauder has also gone for an 8% profit, as has faced some high volume selling recently and has seemed to lose momentum.

A few other positions are also looking a bit shaky. Somero and Portmeirion have fallen pretty hard in the last couple of days.  I’ve kept hold of them for now as the shares are illiquid, prices have fallen on fairly low volume, valuations look cheap and both put out very positive trading updates in May.

My sales have taken my cash balance up to 12.5%. I may add to it more if there is further market weakness. This cash balance provides me with a small insurance policy that I can use to buy at cheaper prices if the current weakness turns into a full blown crash. If instead the weakness subsides then my caution will cost me, but at least I have the opportunity to rotate into higher conviction positions.

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