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Why blue-chips on the S&P/ASX 200 (ASX:XJO) are in the danger zone

Our market has stepped into a weak patch recently as it failed to muster a rally even on days when we have strong offshore leads.

Get used to this as some experts believe the next one-and-a-half months will be a tough period for stocks.

Their prediction seems to be playing out with the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index struggling to keep its head above breakeven, with the top 200 stock benchmark tumbling around 2% in the past week after the index failed for the third time in the past six months to break above 6,150 points.

Even those who do not subscribe to the alchemy of chart reading should be concerned. It seems that the ASX 200 has always dropped into the red in late May and all the way through June, according to Bell Potter’s market guru Richard Coppleson.

He noted that our market has always performed like this over the past eight years, after a strong rally in April.

The average loss in May and June since 2010 is 5.1% and that’s a pretty hefty drop. If this year delivers a similar result, it will see the S&P/ASX 200 tumble to under 5,800 points!

The index heavyweights like miners BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) won’t be spared in such a big sell-off, although I suspect it’s the embattled banks like Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC) that will cop the biggest whack.

Our largest telco Telstra Corporation Ltd (ASX: TLS) and wealth advisory group AMP Limited (ASX: AMP) will also be near the front of the firing line given their unfavourable operating outlook.

Our market runs out of puff about now as investors cash in their chips and there are a few potential reasons for this.

The first is likely to be tax-loss selling with investors dumping underperforming stocks to offset their tax liabilities. You can find out what I think some of these tax-loss stock candidates are by clicking here.

Another reason could be investors changing over to a different fund manager. Asset allocators and funds-of-funds tend to do a bit of a cleanout ahead of the new year where they move capital from one fund to another.

This means the fund losing the business will need to sell shares for the redemption but the new fund manager won’t immediately put the cash to work.

Bell Potter also suggests that there is “re-jigging” of portfolios before the end of the financial year where fund managers sell the underperformers in their portfolio so they don’t have to explain to shareholders why they keep holding on to the dogs.

This period is also the profit “confession season” where listed companies that are making less than they anticipated come clean with the market.

Whatever the reasons, investors should brace themselves. The next 40-odd days could be a wild ride.

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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited, Rio Tinto Ltd., and Westpac Banking. The Motley Fool Australia owns shares of and has recommended Telstra Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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