Miserable. That’s the only way to describe the month of May for stocks.
Every one of the 46 global stock markets tracked by Standard and Poor’s fell last month, with 35 of them experiencing double-digit declines.
In the wake of such a poor showing, we have a few choices…
- We can sit around and play the blame game. My vote would be cast squarely at Greece, as the country’s anti-austerity May 6 election results certainly triggered the worldwide selloff.
- We can sit around and hunt for silver linings. Several certainly exist. Like the fact that U.S. stocks actually fared the best in May among all the world markets on a relative basis. The S&P 500 Index only dropped 6.47%, compared to a whopping 30% freefall for Greek stocks.
- We can give into the “sell in May and go away” mentality, which appears to be working for the third year in a row. (If you’re remotely considering this possibility, though, please re-read this article to find out the factors that could undermine such a market-timing strategy.)
- Or we can “man up” and adjust our trading strategy to both protect against and profit from any further declines. Doing so makes eminent sense, too. After all, June isn’t historically a stellar month for the markets.
Over the last 50 and 100 years, stocks put up positive returns in June less than half the time, according to Bespoke Investment Group. No other months can claim such a terrible track record.
Sadly, the most recent history is even more disheartening. Over the last two decades, the Dow has averaged positive returns only 35% of the time in June.
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So how do we use this negative pressure to our advantage? It’s simple, really. We sell short. Not the market. But individual companies with weakening fundamentals, lofty valuations and significant downside momentum.
You see, if the stock market suffers another 6% setback, it stands to reason that the companies with the weakest fundamentals will get hit the hardest, falling by double-digit margins.
To unearth the best short opportunities, all we have to do is look for the opposite of what we look for in potential long positions. Like rapidly declining profits and marketshare, cash-poor balance sheets, products in danger of becoming obsolete… and so forth.
If you can’t be bothered to carry out such due diligence, there is an alternative.
Yesterday we released the latest issue of our flagship newsletter, WSD Insider. In it, I revealed a company that I think is the most overvalued, vulnerable stock ripe for even more declines. It could easily fall 25% to 30% over the next month or so. All you have to do to find out the identity is sign up for a risk-free trial here.
Ahead of the tape,