Summertime and the living is easy, trading desks are empty and the acting chief investment officer might be the intern.
It’s a take on the old song that shows how the lazy days of summer can be cruel to the markets. Contrary to popular belief, volatility actual increases as trading volumes decrease.
Over the past two decades volatility – measured by the CBOE Volatility Index (VIX) – has normally spiked between July and September.
Technical analyst, Hap Sneddon at Castlemoore says lower volumes combined with the absence of hard financial data tend to “amplify” what is normally considered noise, such as political events or natural disasters.
With Canada Day weekend marking the unofficial start of summer vacation season, here are some tips on how to avoid getting caught snoozing.
BE READY TO RECEIVE
Don’t just hang out a “gone fishin'” sign. Make sure your contacts are up-to-date with your advisor and check your messages at least once each trading day.
If you don’t have an advisor, or just want to be a little more connected, set up alerts on your trading accounts. The good platforms have a wide variety of filter options that can alert you when the stocks you own have big moves, or company news that could make them move.
KEEP INCOME COMPOUNDING
If you’re one of the many investors taking advantage of the spike in interest rates and fixed income yields, be sure to leave instructions to reinvest the cash if bonds or guaranteed investment certificates (GICs) are coming to maturity. Sitting in cash over the summer is dead money.
Be sure your dividend payouts are also being reinvested. Most major stock issuers, mutual funds and exchange traded funds have dividend reinvestment programs, or DRIPs.
Signing on for a DRIP automatically invests payouts in more company shares, which generate their own dividends, at no extra cost the investor.
BUCKLE UP WITH STOP-LOSSES
Placing “stops” on stocks during the summer can lock in gains if they rise in value and limit losses if they plunge.
A basic “stop-loss” is a pre-set price below the current price of a stock you own that will trigger a sell order if it falls to that level. For example, if a stock purchased at $10 has a stop-loss placed at $8, losses will be capped at $2 per share.
A “trailing-stop” automatically resets the stop as the stock rises. In other words, if a stock rises the trigger to sell automatically moves up in proportion to the real-time price, like a moving stop-loss. In addition to locking in gains, a trailing stop locks in bigger gains as the stock rises.
The real skill with any stop-loss order is where to set them. If you place them too close to the trading price they could be triggered by volatility unrelated to the specific security. In addition to losing a potentially lucrative position, investors could rack up unwanted trading fees.
As a general rule, professional traders set stop-loss orders within 10 per cent of the current price but expand them for more volatile stocks that trade on less volume. They often use target prices from analysts that cover the stock, or pick support and resistance levels from technical charts.
Stop-loss strategies vary and are just one of an arsenal of conditional orders that give investors the ability to pre-program their entry and exit strategies.
Investors can also employ opportunistic strategies with buy and sell orders. One strategy for bargain hunters who love a stock but refuse to pay a high price allows them to pre-set a lower price that they feel is fair through an “open-limit order.”
Another conditional order with as many variations as an investor can dream up is a “stop-and-reverse.” Most often, when a long position reaches a specified stop-loss it is sold and a short position is opened at the same price. It’s important for retail investors to be aware that conditional orders are even more vital for short positions, where there’s no limit to how much a stock can rise. In such a case, a “buy-stop” order can limit losses or lock in profit.
Strategies can also be implemented involving partial positions. If a stock doubles, for example, a stop-loss on half the position can preserve the initial investment.
Traders should be aware that in most cases, conditional orders expire after 30 days. If you don’t keep track, your investments may not be protected.
It’s also important to know that a stop-loss might trigger below the pre-set price if a low-volume stock is in a free fall. It’s like firing a bullet at a fast moving target.
With most brokerages, the cost of utilizing conditional orders is included in the trading fee, so there is no extra charge for the investor. Many even offer online tutorials on how to effectively use them.
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