We’ve almost made it to the end of 2021. It got off to a screaming start but around summer the small-caps market seemed to be completely risk averse. In a good market, stocks announce good news and print higher. But in this market, stocks can do everything right and sell off. Take Sosandar (SOS), for example, excellent results, no supply chain issues, earnings before interest, taxes, depreciation, and amortisation (Ebitda) profitability (granted Ebitda is not the best measure of profit), and the stock slumps. This has been a common theme over the last few weeks, and it’ll be interesting to see what happens as we head into earnings season in January.
Lots of stocks are well off their highs yet the indices are holding up relatively well. This is due to some stocks having a higher weighting and so the indices are not a true measure of the market.
What the indices do isn’t of much concern to me. What matters is how my trades are performing. Often, I’ll be searching for stocks that are moving either up or down. This means I’m mainly in high-beta names, or stocks that move more than the market. I have to be as a trader because otherwise a flat stock means no money. For example, a stock I’m building a position in still rose 40 per cent last week (it has since pulled back). I’ve been in that stock for nearly six months and the entire position has been flat. If I have too many positions like that, my bills don’t get paid. But there’s also the opposite end of the argument. I wouldn’t have been able to buy the stock that I have if I’d tried to buy on the day. It typically trades a handful of times a day, if at all.
Having a mix of intraday trades and longer-term trades suits me fine. I’m looking to exploit opportunities where the risk/reward is skewed in my favour. Sometimes that will be highly liquid SETS stocks, and other times it can be highly illiquid SETSqx stocks. There is always opportunity in the market. Sometimes the best opportunities are in the most boring of stocks. This is because the stocks are so boring that nobody bothers to even look at them. Another favourite of mine is to check out stocks that everybody hates. If everybody dislikes the stock, then you can be sure that you aren’t paying a market premium just because everybody likes it. And if everybody does like a stock, and there is a lot of hot money swilling around, what happens if that stock market darling falls out of favour? The answer is that the falls can be fast and nasty. Great if you want to short (shorting darlings on bad news is an excellent strategy), but not so great if you find yourself long.
An ecommerce opportunity?
One stock that’s on my watchlist as of this week is Supreme (SUP). This business is the owner and distributor of several consumer brands. It has its own brands which can command a higher margin and also third-party brands. It is essentially an e-commerce play – a sector that is currently in a nice tailwind. The company released its half-year results earlier this week and saw a gross profit margin increase to 30 per cent from 25 per cent. Revenue increased 9 per cent and Supreme has a well-diversified business account range including B&M, Sainsbury’s, Sports Direct, as well as distribution of brands such as Duracell and Panasonic.
The stock listed at the start of this year at a price of 134p per share. Since then, the shares have been on a tear, rallying to as high as 220p. Chart 1 shows the stock’s trajectory until September of this year, and we can see that the stock pulled back thrice towards the green line (the 100-day exponential moving average). I use lots of moving averages on my charts because stocks react to different moving averages. Some stocks will hug one moving average and another stock may disregard it completely. The 100-day EMA appears to be support here for Supreme.
Moving across to Chart 2, we can see that the support line of the 100-day EMA was broken. The stock then traded under the 200 EMAs before rallying and staying above it. There has been a pop of buying activity on the day of the results and I’ve now set my alert should the stock break out above 219p. This is the closing all-time high. We can see the stock did trade above this in early April, but the price rejected going higher and since then has not printed above 220p.
Watch for resistance
Ideally, I would like to see a nice gentle trend upwards towards the resistance. One of the worst things that can happen is a short and sharp move towards the resistance zone. If there is a quick move, traders may wish to take some money off the table and so the stock is not as tightly held when breakout buyers come in. If there is a gentle trend upwards, then nobody is seeing a quick profit, and should the price break out of the resistance zone, there is less selling activity at that level.
One problem with Supreme is that its market maker driven on the SETSqx platform. That means liquidity is often thin and in the event of bad news it will almost be impossible to sell in any size at a good price.
In any case, I feel Supreme is worth watching for now. Should the price break out, I’d be tempted to take a long.
- You can trial some of Michael’s stock trading course at https://www.shiftingshares.com/online-stock-trading-course/
- Twitter: @shiftingshares
- New subscribers to SharePad can claim a free month of data with the code: Michael