Stocks in a rolling correction? Here’s how you can manage your investment.

09 Jun 2021

The major US indices had their weakest showing over the past month, compared with the first 4 months of 2021. In the past week, US stocks in different sectors like technology, utilities, and small caps have started seeing significant market corrections. And they unlikely to be the only ones to be impacted.

Market watchers are calling the current US market a rolling correction, or a correction that rotates from one sector to another. Unlike a market correction – where prices fall by more than 10% – a rolling correction might see prices dipping by a smaller magnitude.

To be sure, corporate earnings in many of these sectors remains strong. However, valuations have run far beyond justifiable levels. At the same time, there are concerns that the Federal Reserve may start to hike interest rates, as inflation rates start inching upward.

Other sectors that could likely see a correction include retail, consumer discretionary and any others that have been over bought during the pandemic.

Asian markets have not been spared from such corrections either. In mid-May, Asian indices dipped from growing inflation concerns, coupled with worries about fresh waves of Covid-19 infections in several Asian economies, like Taiwan, Japan, and Singapore. Amid sputtering vaccination rollouts, prolonged border closures and renewed lockdowns, volatility in this region is unlikely to let up either.

Investing in a market correction

So what should investors do during a rolling or market correction? Here are a couple of ways to make the market correction benefit your portfolio.

Strategy 1: Review your long-term investment portfolio

In general, a market correction is a common occurrence in a healthy market, and often has limited impact on a long-term investment strategy. That said, a market correction can be a good time for you to review your investment portfolio.

Has your risk tolerance changed? You might have found it easy to accept higher risks during bull markets in lieu of higher possible rewards. A period of market correction is the perfect wake up call for you to review the risk-reward profile of your investments. You may realise that you are less comfortable with the potential losses than you anticipated during the bull market, or you might find yourself even more willing to take risks.

Next, take a closer look at your investments. Are your vested companies doing well in spite of the market correction? Or has the market volatility revealed underlying concerns about their business? If it is the latter, it might be time to adjust the asset allocation of your portfolio accordingly, by divesting part of your investments in favour of other promising stocks that have become undervalued.

You might also want to diversify your portfolio further to adjust your portfolio to a risk-reward profile that is more suitable for your current risk tolerance. If you are seeking to reduce volatility, you might look for non-cyclical stocks or defensive stocks. If you continue to want to see higher returns, you might opt for more high growth stocks.

Strategy 2: Trade the correction for short-term gains

In the short term, market corrections can offer trading opportunities for experienced investors who have the financial wherewithal to do so, without impacting their long-term investment strategy.

For instance, if you have excess funds, you might want to average down your portfolio, or increase your exposure in your existing shareholdings as prices fall. That reduces the average cost of your investment, and help you to gain a better return when prices recover.

You might also want to take advantage of the trading opportunities as prices fluctuate. This is where you would trade Share CFDs.

CFDs, or Contracts For Difference, are an agreement between two parties to settle the difference between the opening and closing prices of the contract. That means investors can trade the price movements of an underlying asset (like indices, commodities and shares) without owning it.

Share CFDs, as its name suggests, are CFDs where the underlying asset is the shares of a specified company.

Share CFDs are leveraged products, which allows investors to trade on margin. It is offered in smaller contract sizes so investors can enter the market with a smaller capital outlay and it also comes with the same risks as other forms of leveraged trading.

During market corrections, it allows you to trade both long and short positions, so you can take a short position on a company to capitalise on falling prices, while retaining your existing long positions.

How to trade share CFDs?

Share CFDs can be traded on proprietary platforms offered by reputable CFD providers. If you plan to trade multiple asset classes besides share CFDs, you can try out the popular multi-asset platform MetaTrader 5 (MT5) offered by Phillip Futures.

The Phillip MT5 platform currently offers over 50 different share CFDs – including US, Singapore and Hong Kong listed companies – and is constantly adding more to that list. Investors trading on Phillip MT5 can trade share CFDs with zero commissionno minimum feesno platform fees, and they can trade as low as 1 share CFD.

The platform also supports ETF CFDs, Indices CFDs, Commodities CFDs, Cryptocurrencies CFDs, as well as Forex. Furthermore, Phillip MT5 is integrated with Trading Central indicators,  and the powerful Autochartist pattern recognition tool.

Try out the Phillip MT5 platform with a free demo account, and start trading share CFDs with zero commission, no minimum fees, and no platform fees today.

An Exchange Traded Fund (ETF) is a marketable security that is formed to track nearly anything, ranging from a specific index, sector, commodity, or increasingly, theme. They are most commonly used to track a basket of stocks, and can typically be accessed through the same channels as regular stocks. ETFs are typically separated into passively-managed ETFs that simply mirror the security they are tracking (e.g. the STI), and actively managed ones that attempt to deliver higher returns or specific investment objectives, often with a pre-specified theme in mind (e.g. ARK Invest’s Innovation ETF).

Why should I trade in ETF CFDs?

  • ETFs have been growing in popularity over the years. 2020 was the best year for ETFs yet, with global equity ETFs seeing more than $1T in inflows within a 12-month period. Using CFDs to gain exposure to ETFs allows for greater capital efficiency because only a portion of the contract value is required as margin to establish a position.
  • ETFs are particularly popular with investors seeking a relatively hassle-free investing experience, while desiring exposure to a range of specific and relatively understandable securities. Trading ETF CFDs brings greater convenience by eliminating the need for traders to hold multiple currencies in order to access global ETFs.
  • An investor wanting exposure to the post-pandemic economic recovery could open a position in the well-known SPDR S&P 500 ETF (SPY), which tracks the performance of the S&P 500. Another investor that may be convinced of the future importance of Environmental, Social and Governance concerns (ESG) may find the increasing selection of ESG-themed ETFs that track a basket of high ESG-rating companies to be a good investment, rather than cherry-picking individual equities by hand. ETF CFDs can act as a powerful tool for traders can profit from both directions of the market by taking on long or short positions.

A look at two ETF CFDs we offer:

1) Has the ARKK been sunk?

ARK Innovation ETF (ARKK) ARKK is an actively managed ETF by ARK Invest that invests in a range of companies based on their innovative and industry-disrupting potential. ARKK’s largest holdings are in companies such as Tesla, Square, and Zoom. ARKK is down around -33% from peaking on 12th Feb and is currently in the red for the year to date as the market experiences a risk-off outflow of funds. Superstar fund manager Cathie Wood has however been consistently doubling down on her bets, buying even more shares in growth stocks that are going through their own tumultuous periods such as DraftKings, Peloton, Teladoc, and Tesla. In her view, ARKK is playing the long game, and remains steadfastly convinced in the long-term prospects of these growth stocks beyond this current bout of volatility. Similarly on outflows, investors are still betting big on ARKK as ARK Invest has only lost about $1.2B in assets this year across all its six funds, compared to seeing an inflow of $15.1B during the same period. Recently, investors have been nervously eyeing ARKK’s basket of tech stocks as their future earnings potential remain vulnerable to erosion through high inflation – the dominant concern of the market in recent weeks. As commodities – the major contributor to the recent heightened inflation fears – drops sharply from record highs, are investor concerns over hyperinflation overblown?

2) Searching for exposure to Asian equities?

iShares MSCI Asia ex Japan ETF (AAXJ) The AAXJ is currently trading -10.6% adrift of all-time highs seen in February, giving up gains in tandem with an Asia-wide equity sell-off at the time. Given that slightly over 40% of the ETF’s holdings are based in China, the ongoing tumult seen in Chinese equities currently have carried over nearly perfectly in the AAXJ, as Chinese investors take a breather after the stellar gains made over the past year. Looking ahead, Asia – and particularly China, is steaming ahead with its economic recovery. China is widely expected to be one of the best-performing major economies this year, providing a major boost to the outlook for corporate earnings. As the rest of Asia and the world gradually opens up their own economies, AAXJ is likely to again benefit from strong Asian outperformance amidst a strengthening trade outlook.

CFD is available for trading on Phillip MetaTrader 5 (MT5).

Features of trading CFD:

  • Trade in both the bull and the bear markets
    The ability to enter a long and/or short position allow traders to take advantage of both rising and falling markets.
  • Smaller barrier to entry
    Flexible and smaller contract sizes. This means that traders will be able to enter into a contract with a modest amount of capital.
  • No expiration date or risk of delivery
    Unlike futures which commonly have a fixed expiration date, CFD allows traders to perpetually hold the position(s). CFD is cash settled, no need to worry about the delivery of the underlying asset.


Benefits of using Phillip MT5:

Trade at zero commission on a dynamic platform that offers low spreads. Integrated with Autochartist and Trading Central Indicators, and available on mobile, web and desktop app, you will never miss a trading opportunity with Phillip MT5.

Register for a FREE 30-day Phillip MetaTrader 5 Demo Account

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