A new age dawns upon us: reopening! Hopefully it is the start of the return to normality. It is to enjoy the summer knowing that well over half of the population has now been vaccinated, and that with every day we are moving closer to our old routines.
How the market will react to this is anyone’s guess. Historically, the announcement of the previous lockdowns marked to the day the market bottoms. Does that mean that once we are officially opening up on 12 April the market will sell off?
Restaurants, bars, and gyms (amongst others) will all open and resume trading. But with stocks such as Greggs (GRG) trading close to market highs with much poorer prospects for the year and JD Wetherspoon (JDW) also within 20 per cent of its all-time high despite two rounds of dilution, one has to ask: how much of this is priced in?
The answer will elude me until I have the benefit of hindsight. But despite that, there is always another stock and always another chart where the conditions for profit are favourable. There are currently 1,946 stocks on the London Stock Exchange, and we only need to be in no more than 20 to have a diversified account that generates alpha against the index.
Obviously, the fewer positions you have, the more uncorrelated your account will be to the index. But this is not always a good thing. Concentration builds wealth, but many forget the opposite of the mantra: concentration can destroy wealth. When a stock goes up you never have enough – but you always have too much of it when it’s going down.
One stock that is currently on my watchlist is Mirriad Advertising (MIRI). This is a video technology company that produces native in-video advertising. What this means is that the company can deploy adverts into video which look natural and real – product placement in old money. For example, if two people are sitting by a pool talking to each other, Mirriad may be able to find a spot to insert a table with two bottles of beer on top of it. In a car chase, the company may be able to place a huge billboard on the motorway. If you’re sick of seeing adverts in real life, more are going to come our way through film and media.
Mirriad floated in December 2017 and promptly bombed from day one. Chart 1 shows a one-way street of sellers right from the first few trading sessions, with seemingly no bidder in the market until March 2019 – a full 15 months later.
This chart is also a great example of why I don’t use the Relative Strength Index (RSI). This is an indicator that tells how oversold or overbought a stock is. The issue here is that overbought stocks can stay overbought for weeks or even months. Selling a stock because the trend is classed as ‘overbought’ is a little like an investor selling a stock because it has now become expensive. Good growth stocks are (and should be) expensive. When FeverTree (FEVR) was running up in its stage two accumulation phase the RSI showed that the stock was hugely overbought. But the stock didn’t seem to care, shrugging this off and powering higher.
I’ve included the RSI in Chart 1 to show that the stock was oversold within the first few trading days and spent the next 15 months oversold. If some people listened to this indicator, then they would be incredibly underwater, as no doubt some of them increased their position because the stock was ‘oversold’ and must therefore bounce.
I don’t use RSI because I don’t think it matters. What I believe matters is supply and demand, and the number of shares swapping hands (volume). The price is only what someone else is willing to pay, and while fancy indicators such as RSI, Elliot Wave and Fibonacci all make you look and sound clever, the reality is that I find them to be distracting noise.
If any of these indicators work for you, keep using them of course. There are many ways to make money trading and if you can use these indicators better than I can to turn a profit then brilliant. But all traders should be aware of the limitations of the indicators they use, as there is no step-by-step perfect method that works every time (sadly).
The key turning point for Mirriad showed itself with a volume spike. This almost marked the bottom of the stock and signalled a potential change in fortunes, although it would be another few months before demand would drive the stock higher in a record volume trading session.
Moving to Chart 2, I have marked another volume spike over a year later which formed a double bottom in the stock. The arrow on the right marks the breakout out of the last previous closing high, providing evidence of a new trend. Since then, the stock has doubled in just over six months. It shows that even though the stock has been historically poor, strong performance is only ever a change in trend away.
After such a strong move from the lows I am hoping to see a period of consolidation. A decline in volume and volatility would build a base for the next move up, with the all-time closing high drawn in on the top line at 63p. We can see that the stock tested the 50-day exponential moving average (EMA) shown as the black line, and so I would use this as an indicator of the trend. A breakdown on large volume below this line would be enough for me to decide that the trend is over and move my capital elsewhere.
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