Downturn Trading

Scott Longley takes another look at the London Stock Exchange and asks how you make money and avoid big losses when the market is sliding

By Scott Longley

The market has taken a bit of a tumble. What happened?

Well, I should have guessed there was trouble when I saw the piece about a 2p coin being worth more than tuppence because of its copper content. It’s like those stories about garden sheds in Kensington being sold for a million quid.

Front page stories in the newspapers always presage a fall, and so it was again. I can’t say you didn’t warn us…

Exactly. From the start I said that markets are funny creatures that can catch even professionals unaware. As it is, in the last couple of months those professionals have lost a bundle. The problem was, people forgot that there were ‘imbalances’ in the world economy, notably in the US. Quite a few people didn’t have that factored in.

How can a market ‘forget’ that?

It’s a strange organic animal. Sometimes its willingness to ignore obvious gorillas in the corner of the room can mean it takes a tumble when someone happens to mentions said endangered beasties.

Who mentions what?

Something of a chain reaction takes place when the gorillas – in this case a slew of bad news – become impossible to ignore. This time, it was bad news about interest rates in the US and Japan, ballooning oil prices, poor US inflation fi gures, and a worsening of the global situation.

Hold on, that’s nothing new. Why the change of heart?

When, as we have today, you have a number of gorillas all patiently sitting at a table in the centre of the party, then it doesn’t take much for the markets to turn their attention from the search for returns to a more defensive stance.

How do you guess when this change of heart will happen?

Well, bearing in mind the nature of this very magazine, you must understand it is all a bit of a gamble. It genuinely is hard to say. What you need is to be attuned to possible changes, keep an open mind, have your stop-losses in place and, when you do decide to go away on holiday, make sure all your open positions are closed for the duration.

Speaking of gambling and holidays, are you looking to take a break in the US any time soon?

I have a feeling I know what is coming up here. Online gaming shares perchance? Well, I suppose in a sense the possibility of online gaming shares being a somewhat riskier proposition than your average bank share is a good example of what you should be aware of. Caveat emptor, as they say.

I beg your pardon?

‘Buyer beware’. The fall in the value of online gaming shares came as something of a bolt from the blue, but the prospectuses of these companies did point out the possibility of ‘actions’ on the part of the US authorities when it comes to the legal side of things.

If it was pointed out, why did the FBI-aided fall from grace of the chief at BetonSports cause such surprise?

Because once again, the market chose to ignore this bit of information.

Why and how can it do that?

Because the profits being made by companies such as PartyGaming (now BPTY), 888, Sportingbet and the like were so huge and the possible growth chart looked so promising it became easy to ignore certain facts. The point about investing – or financial spread betting – is that you’re weighing up the pros and cons in a way that enables you to make a decision whether to back your hunch. A chief executive being arrested helps explain why the sector took such a tumble the other month. But we shouldn’t be surprised. And you should really be looking at such movements as a terrific opportunity to make money – providing you can assess the true value and not the market overreaction.

Is this your way of saying always look on the bright side?

No, I’m just pointing out that when such falls are taking place, there is a strong possibility that someone is making a lot of money out of shorting these shares. In this case, it was well known that the hedge funds of this world have been chasing the online gaming shares up and down the charts for quite a while now and have been making a lot of money out of it.

So what you’re saying is that I should cheer if the markets could go to hell in a handbag?

Something like that. Fancy a tin hat? I know where you can get one cheap.