Good morning! It's certainly not a good time to be holding fashionable blue sky stocks. One by one these are crashing, along with anything else that reached a significant over-valuation in the momentum of the bull market for small caps over the last two years. Not just small caps either, large cap momentum stocks like ASOS (LON:ASC) and Ocado (LON:OCDO) have had major downward corrections, following the dramatic falls in many American hype stocks, such as social media, biotech, etc. Anything that is difficult to value, but looks very optimistically priced, is getting whacked basically!

Just to remind ourselves, look at the ten year chart of the FTSE SMALL CAP INDEX XIT (FTSE:SMXX) (below) to see the longer term trends. So note the huge drop in small caps in 2007-8 (note that small caps fell over well in advance of large caps in the build up to the Credit Crunch). Then there was a big bounce in 2009 as the financial system was stabilised by Governments. We then had a sideways market from late 2009 to mid 2012, as the Eurozone crisis ebbed & flowed. Then from mid-2012 look how small caps have rocketed, almost in a straight line upwards, from 2,400 to 4,200, a 75% rise!

There surely has to be correction from that sort of level, as prices are really looking stretched now, and that's what I think we are now seeing. So this could be a good year to "Sell in May and go away", in my opinion. Or at least for selling anything that has run ahead of itself on valuation. If the valuation is still sensible, and the newsflow is good, then of course I shall remain holding, and will top up on weakness. Very much a case of the market sorting the wheat from the chaff, at the moment.

It's also been a good year for those of us who opened up some short positions on over-valued and dubious stocks a few months ago. I like the concept of having some short positions to hedge your longs, and to mean that you can still make money even if the market overall is falling. Although shorting is quite a specialised area, and…

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