Investing in a Volatile Market — Two Strategies for When Volatility Bites

Investing in a Volatile Market — Two Strategies for When Volatility Bites

Dear Reader,

Hi there! It’s your new Daily Reckoning Australia contributor here. My name is Callum Newman.

I must admit something. I’m not so new. I began contributing to The Daily Reckoning Australia way back in 2012!

What’s going on? For about two years I was writing a similar daily email called Profit Watch.

Your chief editor Shae Russell and I decided to merge them together to (hopefully) create the best investment newsletter in Australia.

You might know me already. If not, nice to meet you! I’ll be covering the markets at least two days a week for you.

Don’t worry! You’ll still be hearing from your regular cast of characters like Jim Rickards, Nick Hubble and, of course, the star of the show, Shae.

Enough about me…what’s going on where it matters? A big old down day in the US of A, that’s what! US markets tumbled overnight. So did iron ore, gold and oil.

Hmm. I know what you’re thinking. This bubble is popping. And it very well may be. But a few down days don’t necessarily make it so.

The tech bubble of 1999–2000 is notorious for five — yep, five — drops of 10% before it finally peaked in March 2000. You could have been wrong-footed multiple times, and the same is true today.

I’m less confident calling the US markets down than I am Australia. The big US tech stocks may be overbid but you can’t deny their powerful business models, huge cash hoards and earnings potential.

What do we see instead when we look at Australia? Iron ore miners and banks drive most profits in corporate Australia. That’s not quite the same position of strength as the US.

The Aussie banks are looking decidedly weak, whether you’re a fundamental investor or a technical analyst. I just can’t get excited about the banks.

And can we trust the price of iron ore? I’m not sure on that but clearly the market is suspicious. Rio Tinto Ltd [ASX:RIO], BHP Group Ltd [ASX:BHP] and Fortescue Metals Group Ltd [ASX:FMG] all topped out before the recent iron ore tumble back under US$120.

We’re in for a volatile time. I told my paid subscribers the other week to expect this type of volatility. It’s important for your investment strategy.

For example, momentum and breakout trading styles will tend to break down in this type of market.

Volatility is the opposite of a trend. That means that kind of trading is likely to result in a lot of stop-losses being hit.

Two Investment Strategies for a Volatile Market

There are two approaches I favour here. One is accepting the volatility as inevitable but positioning for specific stock catalysts regardless. This means you are not relying on the general market lifting for this to pay off.

The second is to look for businesses you’re happy to own for the long term. I’m talking at least two years here. The general market is likely in for a wild and rough ride over the next 12 months.

We could certainly see another bout of sustained selling like we saw in March. But capitalism and company profits don’t ever disappear forever…only investor sentiment and psychology varies wildly over time.

And of course, the Aussie market is rich with stocks unhinged to the general economy.

You don’t need to know what the GDP figures are or the outlook for retail sales when you’re assessing a gold stock. What matter are how many ounces they have in the ground and the cost to get it to market.

A hell of a lot of money has gone to finance gold exploration lately. That spending is going to show up in drill hits.

This is true of other metals too, even if the dollar figures are on a smaller scale. Case in point: give a stock called Chalice Gold Mines Ltd [ASX:CHN] a Google later today.

It’s highly likely to be up a lot. They went into a trading halt last week and have announced a significant new anomaly at its Julimar project in Western Australia (I’m not saying buy it, by the way).

Chalice is having an extraordinary year.

What’s even more extraordinary is its exponential rise began close to the total low point in Aussie stocks in March.

I love that. It just goes to show an extraordinary stock can trump even the worst general economic news and circumstances.

That’s why mining stocks should be on your radar. The traditional blue chip portfolio looks like a ticket to nowhere in 2020.

But some strategic speculations can carry you forward. You won’t get them all right…but you only need one Chalice to cover a few missteps.

The obvious place to start is the gold sector. This is the point you need to leave me and go and listen to what Shae is saying on gold now.

Best wishes,

Callum Newman Signature

Callum Newman,

Editor, The Daily Reckoning Australia

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