Are we heading for a 2021 correction?

14th Feb '21 by WelshMat

21 comments 2000 reads

I'm hoping to get some sense of perspective from you good folks, I'll give you a brief summary of where I am and then my musings.

I managed to pull some of my money out of the market in Feb last year and was able to buy into Sylvania Platinum (LON:SLP) in late March. I closed that position and I'm now looking for somewhere to put my money. I've thought about Games Workshop (LON:GAW), its a company I know well having played Warhammer since the late 80's. It's expensive, but still feels like it may have some more growth to come.

However I'm looking around and I can see a lot of wonderful companies who are all now quite well priced or even slightly over priced. And I'm holding on to a lot of cash (for me anyway) at the moment.

The speed of the market recovery since March coupled with the recent GameStop fiasco, the FT reported on Friday that investors poured $58 billion into Global funds in one week (https://www.ft.com/content/67f...) feels like an element of mania is building. But we are in a situation that most of Europe is still paying for huge number of workers to be on furlough, and sadly a lot of these people probably lost their jobs last year but they just don't know it yet. But at the same time Biden is looking to push through a number of stimulus packages, along with most countries doing the same thing. All of this is making me feel uneasy about putting my money back into the Market but I'm also suffering from a Fear Of Missing Out. I'm trying to look for a bit of perspective from people what do people think about the current situation does it feel like a new plateau that the market will launch from or was last March the down payment on the pain to come. I know there are a lot of factors at work here like super low interest rates are pushing people into riskier assets. My hunch is that we are entering into a period of market exuberance that may be the calm before the storm, and I think that may end (for my money I think that will be in the summer) when when we start to see major economies rolling back state aid and the true costs to the economy…

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GloucesterBob

15th Feb '21

Depends where you are in your own investing cycle.

I'm considering giving up work this year and totally relying on my portfolio to keep me going until my old age pension kicks in around 8 years time. Scary as there no more money coming in, if I get it wrong.

With that in mind, I'm looking to exit my more riskier investments, Revolution Bars (LON:RBG) Tissue Regenix (LON:TRX) £NTLA and up the amount I have in more long term holdings, Volex (LON:VLX) Rio Tinto (LON:RIO) for instance, for stable growth including dividend. 7% gain a year means I never touch the capital.

I also hold Sylvania Platinum (LON:SLP) which is volatile, but can't bring myself to pull the trigger, ride those winners, but we know even Red Rum fell.

All the pundits say the UK markets are undervalued, so depending if you are a trader or long term holder, will probably decide what you do, but remember, no one wants to be a "rabbit" (Art of the execution).

jwebster

All we know is:

1. US stocks are at bubble levels, especially the hot areas like tech, bio, solar, EV, AI, cloud

2. Globally, stocks are not over priced, with Emerging Markets at reasonable levels and UK especially cheap

3. Interest rates are very low, even negative for certain bonds. This makes expensive stocks look not-so-expensive on an earnings yield basis

4. There is a mountain of cash held on deposit by US households and firms, which is likely to be spent as the covid restrictions ease

5. China is doing ok with the expansion grinding on.

6. Commodities are pulling out of a slump.

7. Inflation is low and benign, although rising inflation is a big macro risk

For myself, stocks I bought last year have all gone up, although most did regardless. From here, I don't want to be holding cash this year, due to the opportunity cost, which could be high. I'm not going to fomo into the US stocks but play more in commodities, UK small caps, miners, Asian tech stocks (via ETF) and chip-fabs.

I view commodities as having the wind at your back, UK small caps as cheapish, miners as a higher-risk leveraged bets and chip-fab plants are in a supply-demand crunch period. Asian tech stocks are interesting as they are operating in the biggest growth market globally.

Yes, the US has some hot new industries, but picking the winners is tough. I have considered just putting money into the ARK funds as a 'buzz-momentum' trade to catch the wave while not having to wade through the companies. Some ETFs do this as well, I do hold a video game ETF for example.

I don't think holding cash is useful, although my lesson from the Feb-Mar covid breakdown was if stocks start falling, just sell them and figure out why later. Otherwise let the winners run as these trends could run on for a long time yet.

Bear markets tend to come with a slow rolling top as buyers eventually dry up. I tend to sell stocks when they fade/plateau. While I've sometimes sold too early, this has let me dodge the big falls. I find investing/trading is a losers game in the sense if I have a mechanism to avoid large losses, then I can stay invested and not worry about timing the next market downturn, or making a few mistakes, as I have a natural exit aka stop loss.

Neil D56

Hi Mat,

It is indeed a tricky time to be confident of picking outright winners. I'm gonna quote a pal of mine who is in the 'rocket science' end of investing- he invests for banks, HNWI and assorted others via algos and systems of his own making.

He emailed at the weekend and said this: '

Underlying market movements thus far have astonishingly been bullish. Personally I wish to seek the bearish side of the market as I feel we are imminently near a top. Yes above 3935 is bullish for an impulse move and could stretch as far as 4000 SPX value but it will be momentary. Majors are active before that level preparing large fade moves on options. Speaking of the majors....they aren't chasing this market upwards either ! Average contract trades filled are reducing to single figure contract values....a sign that small traders are assuming risk and are buying that risk from the majors.'

Whilst his MO is different to mine he generally has a good handle on things from a momentum perspective- hope it helps a tad!

Having said all that I am selectively picking stocks when they match my interest. I'm still avoiding travel, airlines and the hospitality sectors as I feel they are so heavily indebted that it will take years for them to recover.

mojomogoz

2020->now is weird

Late 2009 through most of 2012 also felt like now in many ways. It was common to hear people (professional fund managers) say that they were running the momentum-liquidity for the next 3-6 months but then after that there would be a massive correction as the world was screwed.

I'm not saying that today is different or okay just a historic perspective.

This post from May last year still generally holds up IMO:

https://www.stockopedia.com/co...

Snowbum

We need to keep dancing while the music is playing :)

My approach is fairly well aligned with comments by @jwebster below:

'commodities, UK small caps, miners, Asian tech stocks (via ETF) and chip-fabs.'

Surrey Steve

Bull markets climb a wall of worry

Chris Brown

Like you WelshMat, I see many pockets of overvaluation. In the UK maybe best typified by the hydrogen stocks such as Itm Power (LON:ITM) and Ceres Power Holdings (LON:CWR) and in the US, well, many of the growth stocks Iisted on the Nasdaq. However, in the past I've handicapped myself due to over-thinking the issues within the market. I'm currently fully invested, being very selective with my stock-picking, and feel entirely comfortable with that.

I read Reminiscences of a Stock Operator just before last year's crash. Its main lesson is to 'watch the tape': go long as soon as the market is bullish, and go short as soon as it turns bearish. And do both with conviction. It saved me a lot of money last March.

How to know whether we're in a bull or bear market? Price volatility. Not the VIX, which is implied volatility based on options pricing. But quite simply, most of the time the market is going up and daily price moves on the indices average around 0.65% in either direction. In bear markets it doubles to an average of 1.4% each day, and often rises above 2%. If I look at the index level and it says -0.60%, then that's nothing. If it says -2.1% that's a strong short-term signal that I begin to pay attention to.

On that topic, today looks like a conviction move to the upside. Most of my trading is now based on charts. Looking at the indices, I do think they are telling us that we are just exiting a major bear market. If so, the next few years could be a spectacular bull market - perhaps the mania stage to end the cycle.

The market doesn't usually crash on known problems. In terms of left-tail risks that I'm thinking of, firstly market selloffs have often been caused by oil price spikes. Brent is back to $60, I have been expecting $80 within the next six months... but what if it spikes through $100? Supply has really been constrained and economies are about to open up. Or how about stagflation, with commodities causing cost-push problems, but Joe public struggling as govt. support schemes are rolled back. I'm also wary of a big 'buy the rumour, sell the fact' moment, whereby markets may rise leading up to re-opening, but pullback once things are actually back to normal.

nkingy2003

16th Feb '21

Hi Chris.

Interesting post.

I'm wondering about what you do during a bear market. I'm reasonably new to self investing so the question I'm going to answer may well have an obvious answer.

If the market turns to a bear market and there is a big sell off (or you think there is about to be), what do you do? Do you just sell all of your holdings and sit on the cash until you feel the time is right to re-invest? Is there any instrument you can use to make money while the market is falling? Are these instruments available through an ISA?

Thanks,

Nigel

Rusty2

You can short the markets, there are various index shorts that you can hold in an ISA. X FTSE100 SH ETF (LON:XUKS) is one. You can even do us ones in an ISA.

Thanks Herbie. Good to know you can do this in an ISA. I knew there were ways to short the market just wasn't sure if it was available in an ISA. I wasn't aware there were index short ETFs out there so that's good to know!

You all probably know this but there seems to be limitations to hedging with a short ETF. Just stumbled across the below article that details how compounding can cause you to lose money with a short ETF in a volatile market.

https://monevator.com/short-et...

Yes I have seen that before but in reality I found compounding, not to have that much impact but indexes were not going up and down 5% a day. As can be seen, if indexes are falling everyday, then the compounding will work in your favour. But it's best to only use them for short periods, my mistake was closing them too earlier.

WelshMat

17th Feb '21

Wow, I don't think I have time to thank everyone who has taken time out of their busy schedules to answer my question. I think I have learned more from this discussion than I have from several books!

Hi Nigel. If I think the market is looking weak, firstly I'll just focus on my individual positions. I'd hold each position until the chart tells me it's starting to roll over with no support near at hand. However, in general I'm only really focused on trying to avoid the worst of the largest bear markets . The ones such as 2000-02, 2007-09 and 2020. I think every situation like that is different and you have to 'feel' the market at the time. And yes, simply to cash. I've tried shorting in the past using my spread betting account, but it's simply more difficult and I find I tend to lose money on average, trying to short. I think it simplifies things to be long-only. Inverse ETFs do have certain characteristics which mean the mathematics/tracking breaks down, the longer you hold them. I'd read this article as well, before using them.

CabinPressure

20th Feb '21

If you have investments, be happy.

If you have cash, be glad.

For investments, consider the stop loss.

I am waiting for the 'correction' so am in cash. But am researching good stocks, investment trusts, and ETFs.

Also planning a strategy for after the downturn.

May go for British beefcakes like the Builders or the Supermarkets, or may go for the ARK-type Starship Enterprise stocks.

Whatever, it will be different to your plan.

What I must avoid is the quick-draw, buy-it-fast mental attitude, as this market is no place for impulsive cowboys.

Albertos

21st Feb '21

I mainly research and invest in UK small caps and medium caps.

Don't know what others are finding but whenever I find something interesting I'd normally classify the valuation as eye-watering.

Began to ponder that we are potentially entering the end of the bull market and have bought some "blue-chips" to hopefully get the final few % - most are way better value than the smaller end of the market and have the benefit, if the proverbial hits the fan, that they are liquid enough to get out of.

Luthrin

A couple of recent links on this subject that are well worth one's time in my view.

First, on PensionCraft's YouTube channel, a well-balanced overview:

Stock Market Bubble Investing

And second, from The Meb Faber Show, an interview with GMO's Jeremy Grantham (available in various formats):

Bubbles, Venture Capital and Climate Change

Grantham is always a pleasure to listen to. Unlike many well-known market luminaries who can be painful to listen to despite the valuable insights they provide (Howard Marks and Ray Dalio come to mind), Grantham's clarity of thought and articulation without a succession of uhms and errs is tremendously impressive. He deserves a wider audience, but of course he's singing the wrong tune for these frothy times.

florence1

I share your concerns. One definite sign is US 10 year treasury yields are rising quite quickly which indicates rising inflation expectations, and another sign we are approaching the top. Record low inflation = record high s&p, which is no surprise, but when inflation increases as it will as soon as the economy opens up and all that pent up demand and savings start to flow, it will go the other way, and fast. I'd say rotate into cash . Even though UK stocks are not particularly high, they will all fall down in tandem with US.

bryaz

hi matt i dont give advice on shares to anyone but take a look at SUK2 at least you will be making something when the market goes south

Childermass

22nd Feb '21

Great thread.

1 I can't see the risk in holding cash when inflation is nil. It soon won't be though. I was holding cash when the Corona-dip happened last year and bought in then. Couldn't have done it without the cash. Waiting for a crash, then selling to buy is expensive.

2 USA looks very bubbly. UK undervalued on the whole. But if the US readjusts UK stocks will take a collateral, short term, buying opportunity, hit.

3 UK dividend stocks are yielding nicely and showing growth. They often do.

4 Doing nothing is hard, but often a good plan.

5 BTW I am long in Games Workshop (LON:GAW) and have been for years. Good fundamentals, no debt, no competition, great ROI, whole world to go at.

So I'm keeping cash and some very high yielders that are cash positive (both net and cfps). Debt is lethal when interest rates do eventually go back up. 2023?

And Red Rum never fell, GloucesterBob. Unlike the stock market!

Are we heading for a 2021 correction?

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WelshMat

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