Hunting: playing catch-up

A lot can happen in a week – especially in the world of cryptocurrencies. Elon Musk, the world’s richest man, has been pumping a cryptocurrency called Dogecoin. Remember, this is a coin that was created as a joke – it even has the doge dog - a surprised Shiba Inu - as its mascot.

It gets more serious though – Tesla (TSLA) has bought $1.5 billion in bitcoin for its balance sheet. Given that one of the main arguments for bitcoin is that it is decentralised and supposed to be unaffected by external events, the fact that this news spiked the price of bitcoin in somewhat ironic. But there we have it. One of the world’s most controversial stocks buying one of the world’s most controversial currencies. It's a crazy world.

But as always, there is opportunity amongst the apparent madness. The bitcoin market responded immediately to the Tesla news – the latest in a series of what appear to be corporate endorsements of the cryptocurrency - and bitcoin started climbing. But London listed cryptocurrency miner Argo Blockchain (ARB) was slow to respond.

It was several minutes before volume started to increase in Argo Blockchain, so long in fact that I wondered if I had called the read-across correctly. But like we saw in last week’s article ‘Restaurant Group: Prepare for Covid-cues’ (3 February, 2021), it is often at the smaller end of the market where more profitable opportunities tend to emerge, precisely because the market is frequently slow to respond.

Remember correlations

I read about a trader who theorised that the pound would take a hammering on any Brexit news (a theory I’m sure many people would’ve agreed at the time). The issue was to be one of the first to the trade and not get whipsawed. Volatility is great but when the volatility spikes then position sizes need to be lowered in order to take on the higher volatility. This, of course, can see potential returns diminish.

Therefore, in order to trade his thesis of the pound falling, he figured a second effect of the pound falling would be a rush into bonds – specifically US Treasury bonds. Instead of shorting the pound, the trader went long US Treasury bonds and profited from the trade idea that way.

Securities and financial instruments are often correlated and have varying relationships. You can be bullish on varying sectors and get exposure through assets that have nothing to do with the sector but historically have a positive correlation. I did hear once of a correlation between the price of bitcoin and the price of avocados – so ridiculous it might even be true!

A more obvious correlation is between the oil price and the prospects of companies operating in the sector. In the last few weeks Brent has been rising, up a fifth in 2021 alone with the price now printing above $61. Each dollar increase means it boosts the bottom line for producers and exploration becomes more economic. Many companies are operationally geared in this sector with relatively fixed costs. Therefore, all additional profits trickle straight down the income statement.

But whilst many producers have already seen price moves, Hunting (HTG) has yet to make much of a move. The company manufactures and distributes products that help companies extract oil and gas. Its client list boasts many of the world’s leading oil and gas companies.

Chart 1 shows the price of Brent oil alongside Hunting’s share price. I’ve set both prices to start at the same time, and we can see that since the start of 2017 both Brent and Hunting were loosely correlated up into the start of 2019 where the gap between the two assets widened. This could of course be due to factors in Hunting itself, and just because there is a bigger disparity between the two prices does not mean there is a guaranteed opportunity.

Indeed, Hunting’s large exposure to US onshore oil and gas could prove a drag for some time to come. But the company is still generating cash and even pays a dividend. Companies that are worried about liquidity usually are not so quick to pay dividends - nothing stinks more than paying dividends then undertaking an equity placing to shore up the capital reserves. Put simply, this company doesn’t look like it is going bust, and with the price of oil rising boosting the sector then it could be worth looking at for a long trade.

Moving across to Chart 2, we can see that the stock tested the 200-day moving average (grey line) twice and continued its downtrend. This is why I use both that and the 200-day exponential moving average (pink line), because different stocks react to different moving averages. Only by including both do I see the important support and resistance zones for each stock.

We can also see a big volume spike in March 2020 (in the middle of the chart). Since then, the stock has been rangebound with the price going as low as 120p. If it can break out of the resistance zone that I’ve marked on the stock at 250p then this would confirm there is the possibility for a trend trade upwards. The stock is currently trading above most of the longer-term moving averages and I see 250p as a big resistance point. The price has tagged 250p thrice, and we can see that since last September the volume has increased in the stock showing potential accumulation. Hunting is never going to be a stock I’m interested in holding for the long term, but if the price breaks 250p I want to be long. I’d have a stop of around 238p because I want to be out quickly if the stock fails again. If it does, I will keep it on the watchlist and try to trade the breakout again.

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