The market has been on a roaring rally since the start of the year. Great for bulls, and bad for those who’re calling for a market crash – of which there are many.
Jeremy Grantham of asset management company GMO warned of a potential stock market crash in his 2023 outlook letter. Even after last year’s stock market declines, he is calling for the S&P 500 to fall to 3,200 by the end of the calendar year. But he also gives plenty of factors that could prevent a further slide in equity prices. The presidential cycle, declining inflation, continued strength of the job market, and also the reopening of the Chinese economy. So quite a few, then.
So basically: there could be a crash. But there also could be no crash. In fairness, he’s laid out what could happen, which is a lot of things. It’s the people that tell you in absolute terms that you need to be careful of. People who are drunk on doom sound clever, but the reality is long-term bears don’t make money. Just look at the charts of the world’s stock market indices – barely any of them have long-term extended downtrends.
It pays to be bullish. Because over a long enough period of time, the bulls usually win (I am talking about stock markets and not individual stocks). And so even though the market has rallied sharply and the Fear & Greed Index from CNN is 74 (and 1 away from ‘Extreme Greed’), I still believe in going with the flow rather than having strong opinions that are deeply entrenched.
We last looked at Seeing Machines (SEE) on 24 November 2021 (‘An eye-opening tech opportunity’) and back then the stock was poised to break out. It had tagged 12p several times and the trade idea was that if it actually broke out of the level it could go on a rally.
Looking at Chart 1, we can see that didn’t happen. The stock rallied again and failed to reach 11.5p before breaking through all the moving averages and trending downwards for the rest of the year. This is why strict risk management is so important. It doesn’t matter how good a stock looks – if it doesn’t break out then already the price is telling you something: it’s not ready. By pre-empting the breakout, you’re gambling that the stock will break out and rally. It’s far better to wait for the actual breakthrough of resistance to get on board. Imagine holding a balloon and trying to put a pen through it. To start, you’ll get pushback from the balloon as the rubber stretches and expands to accommodate the pen’s pressure. But eventually, the balloon pops and there is no resistance for the pen. This is exactly like the price going through resistance – we want to be buying at the point of least resistance.
Moving to Chart 2, we can see recently that the stock has bottomed twice around 5p and since started to look as though the trend may be turning.
There was a test of the 200-day exponential moving average (EMA) (pink line), and several other tests before the stock started trading clearly above it. The stock is clearly testing the recent high at 7.4p, and I feel a break of this level could be a good risk/reward trade. For stop placement, I’d want to place my stop below the 50 EMA, which has been recent support, and I’d adjust my position size for risk using the position size calculator on my website.
However, there are some things to be cautious about. The Fear & Greed Index from CNN is now showing 77 or Extreme Greed – and so it’s possible we may be in for a pullback in the market at some point. Revenue growth at Seeing Machines is also not terribly exciting, with the year-end results showing that revenue grew 15 per cent to A$54.4mn. This converts into a loss after income tax of A$25.32mn and so there is clearly a lot of work for the company to do to achieve profitability.
Whenever a company is as horrifically lossmaking as this, I always find it a good idea to check the cash flow statement and balance sheet. The company had A$58.8mn in cash and cash equivalents and had a significant post-period investment of US$65mn through Magna International. In terms of capital and liquidity, Seeing Machines should have more than enough for the foreseeable future – so a risk of a discounted placing isn’t one I’m worried about.
One benefit of Seeing Machines is that it's SETS traded – this means you can place orders to buy and sell at different levels on the order book, as well as having automated take-profit targets and stop-losses. This automation suits those with full-time jobs and those who aren’t always able to be at the screens. Such automation can’t be applied with SETSqx, which is a market maker system.
I'll be interested if the stock breaks out of the 7.4p level, but with us being in Extreme Greed and the market having rallied so sharply so quickly, I’m cautious and think it’s not unlikely we'll see a pullback in the near future.
