I’m writing from my balcony again, this time in London – and this week comes with some travel advice. If you’re going to go away, either do so for a week or not at all. I need a holiday to recover from the boredom of filling in forms, taking tests, more forms, more tests… clearly there is a case for staying in the UK until this blows over.
In just a few days (for the first time since early 2020) there will be no restrictions. 'Freedom Day', or so it’s called. Restaurants and bars will be able to cater for as much demand as they can handle, theatres will begin again in earnest, and life will start to go back to what used to be normal.
The easy money is over
But for investors, it is my belief that the easy money has been made. Those who started trading any time within the past 12 months have found markets ridiculously easy. US inflation was significantly higher this week. There is the argument that US markets are priced at a much higher valuation than the UK markets (and the argument is right), but where the US goes the UK follows.
I feel it only right to be careful and rein in the aggression. You can get away with gung-ho shooting from the hip when the market will bail you out and mark everything you buy up – but if you fail to treat the market with the appropriate respect it deserves then you’ll see the market take its pound of flesh from your account.
Time to sharpen focus
I still believe there are great opportunities, but executing on this requires more precision and planning. It’s also a good time to take advantage of the decline in market volatility to focus on future trades. I run my Investors' Chronicle filter (available on SharePad’s filter library) every weekend. This provides me with a list of companies that are within 20 per cent of their highs. This gives me enough time to 1) research the company and see if there is a fundamental driver that is keeping the stock in an uptrend and 2) come up with a plan to trade the stock.
My view is that if I limit my trading account to only 20 positions then I still get the benefit of diversification without things becoming unwieldy. A 5 per cent position size that trebles will only move the needle to a 15 per cent position all being equal (a gain of 10 per cent). Not all positions are equal and nor should they be sized so. First of all, we have to factor in liquidity. It’s no good taking a position that is well above the average daily volume of a stock. How would you ever get out if there was bad news? You should only do this is you believe the reward significantly outweighs the risk, and always position size for 100 per cent position loss.
I have some positions that are well over 10 times the smallest. This is because I am still building in some and others had a higher weighting in my account and have grown. Traders should think like a general – rotate your capital where it can be used to maximum effect.
Time is the enemy of traders. Money that is in dead stocks is not working effectively. But cash is pure optionality, ready to be deployed into battle should an opportunity arise. As the great Jesse Livermore said in the must-read Reminiscences of a Stock Operator: “The chap who is compelled to lug a corpse a year or two always loses more than the original cost of the deceased; he is sure to find himself tied up with it when some really good things come his way.”
An agri-opportunity
For that reason, I have been watching (and not holding) Dekel Agri-Vision (DKL) for over six months. The fundamentals of this trade are attractive due to the gearing in crude palm oil (CPO) prices rising alongside increased CPO production. The company recently announced in its half-year production update that H1 2021’s average realised CPO price was €817 per tonne. This is significantly higher than the €602 per tonne achieved in H1 2020.
Looking at Chart 1, we can see that in the autumn of 2020 the stock starts to see a volume increase and begins to rise. It makes a breakout through all of the moving averages but fails to hold and comes back to test 1.8p several times.
The testing of support was key for telling the market the stock was in the process of finding a bottom. Every time it went to that level it bounced back up. Clear demand at those levels was forming and offering bottom-feeders an entry. That’s not my style as I prefer to wait for a clear breakout – but that’s not to say bottom-feeding doesn’t work. If it works for you, keep doing it.
Moving to Chart 2, we can see that the stock has risen and has now started consolidating between 4.5p and 6p. It’s normal for stocks to take a breather after a large run up – Dekel rose from a low of 1.8p to 6p, which is over a threefold increase. But I believe the stock can go higher and intend to take a long position should the shares break out of the 6p range. Ideally, the stock will gently trend up towards the resistance and see a big volume drive through that level. If the stock rallies sharply into the 6p resistance I’d be careful of traders banking their profits using the 6p resistance as a sell zone. Let’s see what happens.
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