Lessons from large-caps

I don’t understand this space fetish that is common with billionaires. Maybe that’s because I’m not a billionaire. Either way, the idea that space is now becoming a new playground seems silly given that there are enough problems on this planet already. But these people are free to spend their own money however they like. 

However Jeff Bezos' successful landing coincided with the Dow Jones Industrial Average's rip. And as silly as it seems, I do genuinely believe the market rallied because of Jeff’s successful landing. Amazon (US:AMZN) is one of the most valuable companies on the planet and has been spearheaded by Jeff for over two decades until his move to executive chair earlier this year. If the launch had been disastrous and anything had happened to Jeff, I believe the market would’ve taken a hammering. Jeff’s continued Day 1 mentality suggests that he still believes he’s just getting started and he’s now free to pursue avenues outside of Amazon.

Amazon had a hugely successful lockdown. This is a direct consequence of Mr Bezos changing the consumers’ thinking entirely. For example, Amazon was making sizeable profits on its delivery service – but Jeff took the risk. He believed that if he could get customers used to free shipping then this would build loyalty to the Prime membership. Free delivery is not offered everywhere, and it is basic human psychology to not want to lose something once you have it. This meant that customers were drawn to Amazon through the lure of paying a certain amount per year for free shipping, and then were more incentivised to shop through Amazon to get even more value from their membership. Other retailers couldn’t offer free shipping and so were less attractive to Amazon’s customers.

Here is Amazon’s chart from mid-2018 to October 2020. We can see from the bottom line that the stock had failed to break out in summer 2019 after putting in a high in the autumn of 2018. The stock did probe below the 200 moving averages but reversed to test this upside resistance and failed. On 31 January 2020, the stock gapped and traded through this resistance – but as we know the markets collapsed in mid-February which was just a few weeks later. We can see that Amazon fell through the previous resistance and through the 200 moving averages before going on a huge run. I have marked the optimal buy point with an arrow, where there was a high probably entry into the stock. I don’t trade US stocks (and rarely trade such large companies) but there was a 50 per cent gain to be had for those that bought the stock and rode the trend upwards.

It's easy to look back with hindsight now and say that the trade was obvious. But the idea that in a global pandemic one of the world’s biggest online retailers would clean up is not such a silly one. Sometimes, large-caps can offer significantly skewed risk/reward trading opportunities where you don’t have to worry so much about liquidity. This means that you can get in and out with ease and the spread is also much smaller. The inefficiency of small-caps means we can get large moves if you’re on the right side of the trade – but if you can capture a potentially large move without the spread and liquidity risk even better.

Another stock that is a large-cap (but wasn’t always) is Future Group (FUTR). Back when I told my followers I’d bought because I thought it was a multibagger in 2017, the price was trading around 250p. This week, it pushed through 3,500p. I sold far too early but was happy with my multibagger trade, but since then it has consistently offered trading opportunities for the short-term and intraday trader. But moving down to Chart 2, we can see that there was a clear trendline break in April 2021 (bottom arrow), with further trade opportunities on the gap on positive news (higher arrows).

Few would’ve expected a multi-billion pound company to increase by 50 per cent in a matter of weeks – which goes to show there is money to be made in the market across all sectors. I deliberately avoid filtering for larger companies but I now have some work to do to try to see if I can come up with a way to find trades in larger stocks.

When Deliveroo (ROO) listed in March this year, the stock bombed from an open of around 330p to a low of 230p in just a few weeks. There is plenty of volatility up for grabs in larger-cap stocks if you can find the stocks in play.

We only need to look at the success of Darktrace (DARK) and its stunning rise in recent weeks to remind ourselves that no matter what the armchair theorists say: the market is not efficient.

 

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