The Seasonal September Slide: How to Insulate your Portfolio

Any long-term successful trader will know that insulating your portfolio with prudent forms of risk management and adequate hedging strategies is what separates the great from the good. Seasonally speaking, September is typically a weak month for stocks. In fact, it is on average, the weakest month of the year for US equities. During these periods of expected market turmoil, most will say ‘sell’ or ‘hold off’ to avoid running into any traps and losing their dough, however, personally speaking after trading markets professionally now for over 30 years – this is the completely wrong psychology.

Now before we go through some ideas on how you could trade such market conditions (given they do actually occur, sometimes September is strong!) and what may be some risk management strategies around that, let’s actually look at some numbers here. Using our seasonal analysis scanning tool, here is the month of September for US equities. As you can see, the market over the last 25 years on average has lost around 0.8% and only trades higher just 52% of the time. Upon first glance this doesn’t look so bad, right? However, some of the biggest falls in history have occurred in the month of September for US equities. Here’s how it looks on the ASX:

According to the figures, it’s only usually half as bad, indicating an average 0.44% decline in the market through September.

So, the question arises, how do you trade a market that usually goes down for the month? Well, my advice firstly wouldn’t be to bury your head in the sand and stop trading all together. People who do this often miss the big rallies and ‘get in’ way too late to the party. Maintaining a proper trading routine and carrying out your normal process works best, just as long as you have some protection in place. This would come in the form of either a) risk management via a stop loss or use of bought put options, or b) undertaking a hedge. A hedge is a way of protecting yourself against loss by setting up a trade that will profit if the market goes down. Yes, that’s right, you can do that!

Some of my favourite hedging techniques, in the lead-up to what is expected to be a choppy time for markets, includes buying some volatility like some options on the VIX, or buying some short ETF’s. Instruments like SH or PSQ allow for short US equity exposure or BEAR if you’re looking for something on the ASX. If markets do pull back in September as they are expected too seasonally, these instruments will profit – offering a great ability for you to hedge in your portfolio.

Let’s face it – the stock market rewards action takers. To those savvy investors out there the month of September can present some amazing opportunities if we do see the choppiness we can often get. However, playing things a little smarter this September by setting your portfolio which contains elements of both risk management and hedging instruments can help insulate your positions to protect your downside. For anyone unsure on how exactly to do this, reach out to my team at Australian Investment Education to learn more: http://bit.ly/aie-mjb

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