Novacyt (NCYT) has been the star performer on the London Stock Exchange in 2020 with a stunning return of over 10,000 per cent since the start of the year. This gives the stock the elusive and hard-to-earn badge of being a 100-bagger – something very few stocks in their lives achieve, let alone in one year. Yours truly was a shareholder in the 30s having sold for a scalp, and now I feel very silly indeed. It’s tempting to think of what could’ve been had I nailed my hands to the table and ignored the volatility that would’ve come with this stellar run.
But daydreams and reality are very different. Having such a weighting to a high-beta stock such as Novacyt – high-beta meaning it’s an instrument that moves more than the market, or beta – can increase an account’s return substantially, but this works both ways. A significant fall in price of the high-beta equity can mean a damaging drawdown on the trading account in both physical and psychological terms.
Eventually, the position would’ve become so big that the rest of the trading account wouldn’t have mattered, and the entire account’s performance would be hugely weighted to one equity. While you should certainly run your winners, giving one stock so much power over your total performance is something that should not be taken on lightly.
My own preference is to bank profits into strength, and to take capital off the table as a stock moves in my favour. The advantage of this being that unrealised gains become realised (a profit is not a profit until it’s taken) and in the event of a large drawdown in the stock it has then not become overly weighted compared to the rest of the account.
Psychologically, regularly taking profits as a trader is a good thing. The big home run hits are certainly nice, but stocks spend a lot of time consolidating rather than trending. And in some cases, a stock makes the same move several times before it actually breaks the range. Look for yourself on many charts and you will see playing move-to-move from support to resistance can be an effective strategy when deployed sensibly.
Coming back to Novacyt, Chart 1 shows two significant breakout opportunities that could’ve been traded.
The chart also shatters any dreams of a trader holding the shares. We can see in the first arrow on the left that the stock hit a high of 220p before dropping to 63p two sessions later. There is no excuse for any trader to be holding a 71 per cent drawdown because to get back to breakeven the stock would need to gain at least 200 per cent just to get back to where it was.
Rather, the trade was on the breakout of the cup and handle that formed (the bottom red line) which saw the stock run up to over 100 per cent in two sessions. Such volatility is rare.
However, from the second arrow, the stock then had a peak-to-trough drawdown of over 60 per cent. A stock can be the greatest stock in the world, but the numbers always work against us. In this example, we have the benefit of hindsight, and can see that the stock did recover and even go on to double again. But how many stocks act like Novacyt? It’s an exception – and anyone clinging on to a 70 per cent drawdown remembering Novacyt is likely to be disappointed.
In recent weeks, emotions around Novacyt have heated up. Well-known and respected private investor Leon Boros (@Boros10) posted a tweet suggesting that Novacyt’s share price was looking “overheated”. He stated that he was still holding but had much reduced his position.
The reaction to this single tweet was a lot of anger and denial, which suggested lots of emotion in the stock price. Where there is emotion there is often plenty of volatility. Investors who are thinking about what the share price will be next year do not usually care too much about the stock price tomorrow, yet it was clear that many Novacyt shareholders did care and so there lay the opportunity.
Chart 2 shows the stock’s trading sessions since the middle of September, and we can see from the arrow (the stock announced spectacular results on this day) that the stock rerated again.
But what next? Over the past week, the stock has offered extraordinary intraday swings. But it has moved now from SETSqx to SETS. That means anyone can place their orders directly onto the book with direct market access. The SETS trading platform means improving trading liquidity (and therefore less volatility). This is because when a stock is market maker traded the market makers are constantly jobbing the stock about up and down to fill orders. They know that punters will have stop-losses and constantly move the price in order to get people to buy and sell. In SETS, anyone can easily just place an iceberg onto the ask and kill any short-term momentum in its tracks.
That doesn’t mean there is a lack of volatility, and it does open other strategies such as placing orders onto both the bid and the ask and working these throughout the day, but trading liquid SETSqx stocks can see much greater volatility.
For those thinking that such a rise warrants a short I’d urge caution. Unless it’s a short-term short trade, the trend is still clearly up. And just because a stock is overheated doesn’t mean it can’t go higher.
For now, wait for the stock to break out through its previous high at 1260p, or wait for a breakdown to go short at 800. Let the trend dictate the trade.
- Michael has released his UK Online Stock Trading Course. Investors Chronicle readers can download Michael’s book and learn more about the course by visiting www.shiftingshares.com/online-stock-trading-course
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