AT last, we have had some good news from the Russo-Ukrainian war. Ukraine has pushed into Kherson and started an effective counteroffensive. Naturally, Russia denies this.
But what does this mean for traders? If Russia is pushed back far enough, does Putin get pushed out? If the gas is switched on, then shorting gas plays becomes the trade. Where does that money go? Renewables?
At the moment, natural gas is a crowded trade. Since my last article, many gas stocks have risen significantly and prices have exploded. But while it would appear prices can go to any level it is impossible to call tops. I have reduced some of my exposure to this trade simply because I’m sitting on hefty paper profits and so I’m hitting collect on some. As Nathan Rothschild said: "I never buy at the bottom and I always sell too soon". Selling too soon is certainly better than selling too late.
One thing I have noticed with markets is optimism often triumphs. And that’s a good thing. Historically, it doesn’t pay to bet against the stock market. But while the stock market indices trend ever higher, the grim reality is that most stocks underperform (in the long run) Treasury bills. That means, if you’re tempted to pick your own stocks, that statistically if you randomly pick a stock then you’re likely better off buying short-term debt obligations from the US Treasury Department.
However, neither you nor I randomly pick stocks (at least I hope not). And it is possible to have an edge and outperform the market – especially in small caps. But optimism is often misplaced and traders can take advantage of this.
For example, look at Chart 1 of Wetherspoon (JDW). On the left we can see the Covid-19 crash. The price hit 500p before rallying and testing 1,200p. That’s a 120 per cent move from trough to peak. It wasn’t until November that the stock broke out on good volume because of the vaccine announcement, and from then the stock managed to rally to 1,400p. We can see that this level was tested several times and became major resistance, then the stock broke down through the 50-day exponential moving average (EMA), and then the pink line (200-day EMA). From then onwards, since July last year, the stock has been in a downtrend and has been knocking up a big win for the shorters.
We can see that JDW is now in a stage four downtrend. It’s also trading below the Covid lows, and with two fundraises since then, achieving its all-time high will be even harder. As of writing, I am short Wetherspoon stock with no immediate intention to close. But even if you don’t short, the warning signs were there in the chart. Breaking through support, continued trending downwards, 200-day EMA pointing down, not to mention the well-telegraphed headwinds of the cost of living crisis, inflation and energy prices. Of course, it’s easy to say in hindsight, but it’s also fair to say that this price fall shouldn’t come as a surprise.
Furthermore, Wetherspoon is not a tiny minnow. The market cap at 492p is £633.5mn. It’s strongly held by institutions and those who are generally considered the ‘smart money’. There are two points of note here: Firstly, the market isn’t efficient. Secondly, optimism often triumphs over reality. Understanding these two points can make you an effective operator in stocks.
The truth is I have no idea how the next year will play out. But what I’m sure of is that in the immediate future companies with weak balance sheets will struggle to raise capital, and any company that places equity will likely need to see it done at a bigger discounted price due to a lack of investor appetite. We’ve seeing that play out over in recent weeks.
Consumer discretionary stocks will also continue to struggle. If you’re a regular reader of this column then that sentiment from me won’t be a surprise – but just because a stock has halved doesn’t mean it can’t halve again. Lots of them are doing exactly that.
Finally, I’ve noticed that trends and themes often take longer to play out than anyone expects. This is something that I’ve learned during the Covid-19 bust and rally. I expected Covid-19 to tear apart supply chains and cause inflation. Given the disruption of lockdowns and the devastating effect lives and economies it made logical sense that transactions would slow or even grind to a halt, and that this would put the global economy on the back foot. That didn’t happen. Instead, what we got is stimulus and a huge boost in asset prices. People went crypto crazy, Rolex prices hit the roof, and house prices soared.
However, it finally appears we’re catching up. And while Russia’s invasion hasn’t helped, it was by no means the cause. We may now be finally paying for the damage of Covid-19 more than two years on. Again, looking at Chart 1, it has taken some time for the market to catch on.
Chart 2 shows the FTSE 250. We can see the chart started breaking down through the 200-day EMA in early January.
I should’ve taken more notice of this, and started increasing my short exposure. But you learn every day in this business, and I’ve certainly learned a lot this year.
When the soldiers (FTSE 250) begin to rebel against the generals (FTSE 100) – it’s time to take notice.
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