How To Protect Yourself When The ASX Market Bear Roars Again

Financial brokers discussing stock market quotes, rear view

Another day, another crisis. When I woke up Monday morning I did what I always do, look at the ASX website. A sea of red. The All Ords down 2.2%. ‘Oh dear’ I thought to myself, ‘this should be fun’.

The next point of call was The Age and the Australian Financial Review websites. It was more or less how I expected it to be.

‘ASX loses $35b in worst day since Brexit’ — The Age

‘ASX turns red as rally fizzles’ — Australian Financial Review

‘Australian shares shed $38b in sell-off’ — ABC News

‘Australian stocks pummelled in wake of Wall Street sell-off’ — The Australian

Add to mix is the obligatory picture that seems to always accompany this kind of news…

Source: Sydney Morning Herald
[Click to enlarge]

The old roaring bear. Gotta love him. I don’t know his name. So we’re going to call him Barry.

‘Barry the Vicious Market Bear’ is as famous as Yogi, Paddington, Baloo, Rupert and Winnie the Pooh. In fact, I see far more of Barry on the TV than I do of any of those other famous bears.

I do find it interesting how the investment world calls a falling market a ‘bear market’. Apparently the origins of the term ‘bear’ market are loosely based on the nature in which the animal attacks its prey.

A bear will swipe down at its prey. Crushing it to the ground, it will then devour its intended target. Hence a down market is a bear market.

On the flip side a bull will charge at a target and thrust its horns forwards and upward. Hence a rising market is known as a ‘bull’ market.

The investment world is rife with animal names describing investment principles.

An ostrich is an investor who fails to act on a situation or event that will affect their investment. Makes sense. It’s the ‘keeping your head in the sand’ concept.

What about a sheep? I bet you can guess what that is. It’s an investor who simply follows the masses. They don’t have a real strategy of their own.

I like the way that we can use nature to look at investment and investor behaviour, and market situations. If it helps the average investor understand how things work, then why not?

It comes as no coincidence that I’ve actually been working on a new system for picking stocks. This technique is based on the behaviour of an exceptional animal, routinely found in nature.

It’s something I’ve been working on for well over a year now, and on Saturday you’ll find out more in a special report.

Market goes down, stocks go up

But what of Barry the Vicious Market Bear? We see him so regularly now, is there cause for concern? Is Barry about to rip your investments to shreds?

Well in short, no. At least, not if you’re picking the right stocks.

The overall Aussie market was down 2.2% on Monday. And on Tuesday, while it got off to a good start, the ASX All Ords again closed down for the day.

But that doesn’t mean that every stock on the ASX was down. There were stocks that had a glorious start to the week. While Barry was raging through the mainstream media, some stocks were laying on double-digit gains.

Did you hear about those stocks? I doubt it. They’re not the kinds of stocks the mainstream media follows. They’re not the kinds of stock the average investor ever hears about. Most people simply don’t know they exist, and so don’t ever watch them.

But I was watching them.

I’m always looking for stocks that perform well in extreme market conditions. I think they’re the best kinds of stocks. When everyone else is running around in a panic you want stocks that go up.

And then if markets go up and hit record highs, these stocks can do even better.

Simple right? Market goes down, stocks go up. Market goes up, stocks go up.

Well simple in theory. Difficult to put in action — unless you spend your days and nights uncovering and investigating such stocks.

Three stocks that defy the market

For example, Hills Ltd [ASX:HIL], an $84 million company on Tuesday morning, was a $124 million company by Tuesday afternoon.

That’s not in tune with the market, is it?

Hills announced part of their business was going to merge with another company. They would then demerge this new entity as a listed company.

It sent the stock bananas. All because of a single piece of good news.

Take a look at Opthea Ltd [ASX:OPT]. This $126m biotech is developing therapies for the treatment of eye disease (yes, the pun above was intentional). On Tuesday Opthea put out a seemingly mundane announcement.

The announcement explained they had presented results of their Phase 1 clinical trial at the European Society of Retina Specialists Congress in Copenhagen over the weekend. The presentation highlighted the positive data from Opthea’s clinical trial.

This sent the stock price into overdrive. At one point during Tuesday’s trading the stock was up 28%. But that wasn’t going to last…the stock only closed up 18.31% on Tuesday.

Again, this is an example of a small-cap stock which can thrive in extreme market conditions. It’s just the kind of stock we hunt down in Australian Small-Cap Investigator.

Or then there’s BigAir Limited [ASX:BGL]. At the time of writing the stock has a market cap of just $147m and a stock price of 84 cents. After trading on Tuesday, Superloop Ltd [ASX:SLC] a ‘dark fibre’ company, announced a proposal to takeover BigAir.

Superloop is putting two options to BigAir shareholders. Option 1 (all script) places an implied value on BigAir stock at $1.22. Option 2 (script and cash) put the implied value at $1.00. These figures of course will change based on Superloop’s price, but at time of writing Superloop was trading at $3.31.

The ASX could tank tomorrow. It could skyrocket. It could do six-tenths of bugger all. It’s not going to make a difference to the stock price of BigAir.

If the closing price of BigAir was 84 cents and Superloop values the stock at least at $1.00 — well I think you can figure out what’s going to happen.

All of these companies are small-cap companies, I might add. In my view, it’s only in small-cap companies that you can find this kind of wild performance regardless of what extreme the overall market is at.

Of course, this segment of the market isn’t for the fainthearted. It can be incredibly risky buying small-cap stocks. But the payoff can be extraordinary.

As mentioned earlier, I’ll be releasing a new report on this come Saturday. This could help you make sense of the opportunities in the small-cap segment of the ASX. And I’ll also tell you about a new kind of investment bear — except this one is very different, and far more exciting than Barry the Vicious Bear.


Sam Volkering,
For The Daily Reckoning

Sam Volkering
Sam is Editor for Money Morning and it's small-cap and technology analyst. He spends his time hunting down the most exciting stocks on the planets, whether they’re potential-packed volatile small-caps or tech firms transforming our future through cutting-edge technologies. You can find more of Sam’s work over at Australian Small-Cap Investigator, where he shares the best small-cap stocks he finds on the ASX, or at Revolutionary Tech Investor where he reveals the latest breakthrough tech investment he’s discovered.

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