Since my last article ‘Exploiting the triumph of optimism’ (31 August 2022), the market has tumbled further, prompting people to start asking if it’s the bottom. Who knows? Maybe, and maybe not. But what we can safely assume is that things can always (though hopefully not) get worse. It would be great to see a positive conclusion to the end of the Russo-Ukrainian war which would set some certainty in the market. It would also give us a base for a new bull market. Great territory gains have been made in the last month but what will happen yet is still anyone’s guess.
My plan remains much of the same. Buy what goes up, and sell what goes down. Trying to average losers is a mug’s game (I accept that investors may think differently, and quite rightly so, as investing is a different sport completely to trading) and what halves can always halve again, and halve again from there.
One weapon in my trading arsenal which has come in useful during this bear market is the use of the short trade which is a bet on falling share prices.
The issue here is that losses are potentially unlimited. If you’re a professional trader then you have to wear all your losses. If you’re short a stock and it multiplies in price several times then you’ve now lost more than what you could’ve earned from the stock going to 0p. This is why shorting is an advanced trade and should only be done by those who have assessed the risks carefully and understand the mechanics of the trade.
Another issue for shorters is that they are at risk of being squeezed. In a heavily shorted stock the risk of being squeezed is higher because if there is better-than-expected news then the stock can rally sharply as buyers step in – then shorters are on the back foot as the price is now moving against them. And they’ll be aware their losses are unlimited. If they get spooked, shorters rush to cover and this pushes the price higher. Plus, there are traders out there who smell blood and start buying to squeeze the short traders and mark the stock up to hurt them.
However, shorting is best done on companies with larger market caps. A stock that has a £100mn market cap needs to add £100mn in extra shareholder value for a shorter to be 100 per cent underwater. When you short smaller stocks – especially ones that are illiquid – they need to add a much lower amount of value in order for a short trader to be 100 per cent in the hole. Plus, it’s even harder to get out!
I still believe there are opportunities on the short side, but the risk/reward ratio for these types of trade become less in your favour the further into the bear market we get.
And as well as looking for shorts, you should constantly be looking for the winners of tomorrow. They won’t just punch you on the nose and say 'buy me'. You need to work and do the digging required. The new bull market stocks will show themselves through strong price action and breakouts long before the rest of the market has caught on.
One stock I am long of is Crestchic (LOAD). This is the old Northbridge Industrials and has changed its name along with its strategy. It has sold the Tasman division and is now purely focused on its Crestchic division, which hires and sells specialist power reliability equipment, mainly loadbanks.
I got involved in this stock when it was clear that the story was changing, the fundamentals were strengthening, and the stock broke out of a seven-year high.
Looking at Chart 1, we can see the stage 4 decline on the left of the chart as the stock fell from 600p to as low as 75p in October 2015. From then on, the price has traded in a wide range but ultimately trendless. It threatened to break out several times but tagged the 180p mark twice, hence making this resistance.
As well as sideways trading, the stock has also undergone a fundamental transformation. There have been four upgrades this year and SharePad has the consensus as £8.05mn in post-tax profit for FY23. At a market cap of £79.1mn with a share price of 281p, that currently means the stock’s share price is rated as just above 10 times its earnings by the market.
Given that the company has just done £4.2mn in the interim results for FY22 my view is that these forecasts are at risk of being beaten again.
The stock is now clearly in a stage 2 uptrend, too. Moving across to Chart 2, we can see the stock broke out and retested the 180p level before gradually trending above it.
However, it was an RNS informing the market the company was trading ahead of expectations that put a rocket under the share price, lifting it from 200p to nearly 300p within the space of two weeks. Since then, the company announced its half-year results bringing further upgrades, and so while we should never assume the company will always upgrade its earnings, the future does look bright.
I want to average up in this position at 295p if the stock can break out of the recent base it’s building. So far, the shares have held up in the market volatility and have been a safe harbour when everything has been falling. With the size of the potential market and the execution of management so far, I’m happy to try and ride the trend upwards.
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