Good morning!
Profit-taking
I'm noticing that a lot of expensive small caps seem to be suffering from profit-taking at the moment. My feeling (expressed often here about individual companies) is that momentum seems to have taken a lot of fairly ordinary businesses up to valuations that really cannot be justified. This is especially true of small caps which have been tipped somewhere, and hence have attracted a lot of flakey, short term shareholders.
I don't mind paying a high PER (anything over 20 feels high to me) for a business that is growing strongly in a good niche. However, I'll bank the profits and move on, if a fairly ordinary business reaches a valuation getting close to 20. There are plenty of them around - so do be careful - I think we're going into a more wobbly patch for the markets. Hardly surprising when you consider nervousness over the US election.
Perhaps UK markets are beginning to factor in higher inflation next year, and the possibility of interest rate rises? I don't know. It all needs careful consideration anyway - we don't invest in a bubble. Although we always like to fit reasons around stock market movements. With small caps it's often much more simple - they're illiquid, and a few people banking their gains since June just knocks the prices down. This can provide good buying opportunities in the right shares. I'd much rather buy the dips, than chase prices up during a bull run.
Hedging
Given how close the US Presidential election seems to be, and the possibility of an upset, I've taken the rare step of hedging my long positions. I've gone long (via IG) of Put Options on the S&P 500 Index, with a strike price of 2050. The current price is 2104, so these options are currently 2.6% out of the money.
The expiry date is 17 Nov 2016, so it's just short term protection against a potential plunge in the US markets over the election period.
I expect we'll see considerable market, and exchange rate volatility over the coming fortnight, so I hope everyone has their hatches battened down.
The nice thing with hedging is that I expect (and hope) that my hedges will expire worthless. However, having the hedge means that I can sleep soundly, and not get shaken out of my best positions by worrying about the downside risk.
I'm padding this out a bit, because there's very…
