Is Winter Coming?

One of the classic investing/trading chestnuts I’ve long sailed my ship by is “sell in May and go away“.

It doesn’t always work of course, and I’m certainly not clearing out my entire portfolio every year when May comes around, but I’ve been lucky enough to dodge more than my share of bullets over the years by casting a cold eye over the markets in early to mid-May, and pursuing a less active trading strategy in that half of the year.

With Autumn well and truly underway, I’m finding myself much more worried about the October to May period than I usually am. Put simply, I suspect something a little more serious than a “correction” is just around the corner.

I’m far from an economic doom-monger under normal circumstances and bullish about the American economy long-term. I still believe that the sheer amount of drive, energy and technical ingenuity that this country is lucky enough to possess will see us good for many years to come. In terms of the short-term economic forecast however, Winter may well be coming.

I’m seeing signs of this everywhere I look at the moment. In particular, Caterina Fake’s recent piece on cockroaches versus unicorns crystallized something I’ve been mulling over for a considerable time.

The last five years have seen an enormous amount of real business and consumer value created by venture capital backed Silicon Valley firms, but there are an awful lot of poorly run “businesses” out there (backed by dumb money) getting by purely by spending other people’s money. It’ll be very interesting to see how things play out if the climate turns chilly. As Warren Buffet famously put it: Only when the tide goes out do you discover who’s been swimming naked.

I’m a value-based investor by nature, and don’t like to drive myself crazy looking at weekly charts, but many of those who track short-term cycles are starting to sound alarm bells.

This year’s Greek farrago and ongoing far from positive rumblings from China are just some of the wider factors making me feel distinctly uneasy about where we might be heading in the next few months. Even the IMF seem to be getting the jitters.

I’m not going to be taking any panic-driven approaches to anything in my current portfolio but there will definitely be a period of careful review between now and the end of the year. I’ll be reviewing carefully to see where I can weed out anything that might be particularly vulnerable to a prolonged short-term downturn.

A word to the wise: if you’re currently running a high-risk portfolio based on charts and predictions that only ever go up and to the right, now is a great time to reconsider how exposed you might actually be.

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