The ASX has had a tremendous run over the past few months. Since its lows in late-March the S&P/ASX200 Index (ASX:XJO) has surged nearly 37%. However, in my opinion there are a few headwinds that could be facing investors in the near future. Here are some factors to take into consideration when deciding whether or not to sell your ASX shares.
Have ASX shares run too far?
Around 4 months ago during the height of market volatility, many investors were unsure how companies would ever recover, let alone ever trade at all time highs again. What has transpired over the last few months has been astounding, with some ASX shares making once in a lifetime moves.
A great example of this is Afterpay Ltd (ASX: APT), which hit a low of $8.90 in late March. Many investors questioned how buy now, pay later users would be able to meet their repayment obligations. Despite the pessimism, government income support and the rush to online and cashless retail has fuelled demand for the company's services.
These moves have not been limited to technology companies, with online retailers like Kogan.com Ltd (ASX: KGN) and meal-kit provider Marley Spoon AG (ASX: MMM) also harnessing the change in consumer behaviour.
Despite government stimulus and certain companies buoying the overall market, many investors might be looking to take profits after such a miraculous run. A gloomy budget deficit, high unemployment forecasts and the looming reporting season could also serve as catalyst for a pullback.
Be wary of the upcoming reporting season
The upcoming reporting season in August is set to be one of the most complex and volatile seasons in recent history. The United States reporting season, which is currently underway, has provided a glimpse of the uncertainty and volatility Australian investors can expect.
Heading into reporting season, many investors would be relatively optimistic given there have not been a significant number of earnings downgrades. However, like all reporting seasons, there are bound to be some surprises.
What to watch this reporting season
It will be interesting to see how companies disclose the impact of the pandemic to investors and how the market will react. Furthermore, with many ASX companies implementing cost-cutting strategies to protect their balance sheets, it will also be fascinating to see how dividend payout ratios are impacted. Shares in the travel sector are already expected to report badly whereas there is more optimism for shares in the health sector. Reporting season will provide an opportunity to find out exactly how the pandemic has impacted the bottom line of companies in the tech sector. Meanwhile, the results for ASX bank shares are also likely to provide good insight into the country's recovery prognosis.
Foolish takeaway
As a long-term investor I would usually advocate for shareholders to stay invested through the regular troughs and peaks of the sharemarket. However, the share price moves and general market volatility we have seen during the pandemic are an anomaly. Rather than selling the lot, another prudent strategy investors could adopt would be to sell a portion of their holdings to lock in profits. This would keep them invested whilst also freeing up some capital to take advantage of more opportunities that could arise during the August reporting season.
