What’s your edge?

EDIT: I’m working with my developer to alert you via email when the March edition goes live. It’ll be on Tuesday 7th March as mentioned below but next time you’ll be emailed when it’s live.

I’ve been thinking about this a lot.Many people come to the market ever year, and every year the revolving door of losers continues.

Why is the market so difficult? And why is the market so attractive?The market has no limits. It can take everything from you or you can earn handsomely based on your skill.

It’s also a unique situation where humans are not naturally psychologically suited for.To become successful in the market, you have to unlearn many of the instincts we’ve had hardwired into us from evolution.For example, our ancestors many years ago.. if they thought there was a predator going to eat them they had two choices:

  1. Run, and don’t wait to find out

  2. Wait to find out, and don’t run

One of these options has a way higher risk of getting eaten.And if there was no threat? No harm done.

Therefore, running with the herd was sensible because the slowest human risked being eaten.

That’s not the case in trading. Doing what is comfortable is not always profitable.In fact, sometimes it’s the most uncomfortable trades that are the best trades.

Now, I’m not saying be a contrarian for contrarian’s sake. My contrarian view on being a contrarian is that it’s not taking the other side of what people say.Being a contrarian is thinking for yourself.

And this is partly why success in the markets eludes so many.

Success in the market feels uncomfortable. Think about it.

You’ve got a position -18% and only 2% away from your stop. You’re convinced the stock will come back up and that you’ve just been unlucky so you want to move your stop further.

You end up moving your stop to 25% away from your entry and you now feel more comfortable.The problem is you’ve ended up taking on even more risk. Doing what is comfortable has hurt you.

And in another position, you’re +20% up and see no reason to sell as per your plan.But what if the stock pulls back and you give back some of your gains? What if the trade goes negative and you lose?

You end up closing the trade because you wanted to lock in your winnings and cement yourself as being right on the trade.The problem is you’ve ended up potentially chopping a fat-tail winner. Doing what is comfortable has hurt you.Part of that problem is that there are zero barriers to entry. There’s nothing stopping anyone from opening a trading account (and millions of Furlough Freddies and Fionas did).

But unless you have an edge – you’ll quickly give back any capital you’ve gained and more.

So, what’s my edge?

There are several parts to what I believe contribute to my edge.I share my complete system in The UK Stock Trading Course but I’ll break them down now.

1 – I am not afraid to put the time in

I love trading. But sure, there are times on a weekend where I’d rather not be running my filters and going through charts. I do it anyway, because 1) I don’t know when I’ll find my next big winner, and 2) employment for me isn’t an option so I’d better do my job properly.

Therefore, consistency means that I’m constantly keeping on top of the market and alerted to potential changes. For example, a lot of stocks are starting to roll over? We could be coming into a market downturn. Stocks starting to turn up? Market is risk-on.

Of course, you can put in a lot of time and achieve very little. But not doing the work is setting yourself up to fail.

2 – A system where I outsource a lot of the heavy lifting

I am a big fan of SharePad and use it filter stocks, create Watchlists, colour code and filter RNS announcements, set up price alerts and alarms..

See my walkthrough here: https://knowledge.sharescope.co.uk/2020/06/07/the-trader-taking-advantage-of-sharepad-news/

The benefit of setting up price alerts is that you can track stocks without having to have them in your conscious memory. If I like the look of a stock that could be a potential stage 1 base, I’ll set up a price alert to notify me if the price hits that level. If it ever does – I get alerted.

Through this method I’m constantly building up a pipeline of trades. For example, DOTD that I bought on Thursday featured in a Buy The Breakout last year. I did the work, and several months later the trade set up.

It’s like a second brain to me, and I’d struggle without it. If you’re not already using it you can sign up for a free month here.

3 – I am adaptable

Finally, and potentially the most important part of my edge, is that I don’t have any problems admitting I’m wrong or doing a 180 and flipping long to short or short to long if I need to.

When the facts change, I change my opinions. And being able to quickly change your mind when the information materially changes is a big driver in P&L.

I’m not married to a stock. If it goes and triggers my stop – I’m out. No questions asked. No “what if I just move it down a few ticks”, no “but this time it could be different”, no “but the last news was good”.

Not properly controlling and capping risk is a big killer of traders.

And that goes for the market too. When stocks are falling I go short. When stocks I rising I go long. By constantly running filters and covering a few hundred stocks a week I have a good read on what’s happening overall.

Once you get over your fear of “the stock might go up after I sell it” then you can start taking the market for what it is: a mechanism for you to extract P&L from those who aren’t as skilled as you, don’t work as hard as you, and don’t want as smart as you.

Where are we in the narrative cycle?

I’ve been saying for a few months now that I think these could be the beginnings of a new bull market.

Certainly, it’s a risk-on market and anyone net short since October has likely done their dough. Again, when the facts change – change your mind!

But what I’ve noticed is that a lot of people are predicting a stock market crash. And no, I’m not talking about the author of Rich Dad Poor Dad who literally predicts one every year in order to stay relevant.

I mean actual credible people.

Yahoo Finance (Motley Fool) doesn’t count.

And maybe they’re right. We’re certainly due a pullback.

Source: https://edition.cnn.com/markets/fear-and-greed

I don’t read too much into this. But I will often take profits on trades that are not high conviction or on stocks that have nicely rallied and I don’t want to give them back. Why would I let other people take my profits if they’re not long term trades?

But it comes back to what I said earlier: trade what you see.

And what I see right now is:

  • Stocks breaking out of long term bases

  • No amazing short opportunities

I’m sure there are great short opportunities out there. But unlike the first half of 2022 – it’s not like shooting fish in a barrel.

Twitter is quiet. Liquidity is thin. It’s probably uncomfortable going long. But that’s exactly why you have to. Put risk on, manage it, and increase exposure as the market steps through the gears. If it doesn’t, you haven’t lost much.

In a raging bull market you can just about go long anything and probably still make money.

We’re not there yet. Play tight.

Stocks to watch in February

Dotdigital (DOTD)

Here’s a good example of a stock that has gone through all stages and now back to the start of what is hopefully an uptrend.

We have the stage 2 uptrend at the left of the chart as the market jumped on the ecommerce boom and a huge wall of cash buying risk on assets.

But the wheels started to come off in October 2021 and we had our first profit warning. If you were long and not out already, this was a clear sign to exit the stock. As it happened, we then saw another profit warning in March of 2022.

Look at the volume spike on the March 2022 profit warning

The volume in March 2022 tells me that although a lot of stock was being sold, even more stock was getting bought as volume accelerated and the price put in a low of ~52p.

It came onto my radar at the end of last year as although the stock hadn’t broken out – it was trending sideways and had yet to reach that monster volume low.

Sideways trading is incredibly attractive for me. I want to see the longs throwing in the towel and moving on. I want new holders to pick up the slack.

The average per per share bought comes down as sideways action goes on, and the longer it goes on the more this comes down. Why is this important? Because there is less drag on the price as it rises (assuming it does rise) as the amount of holders who are massively down has dropped.

Old shareholders who are in the red and replaced by new shareholders who are holding around the current price. The longer the sideways trading the better!

Here’s a closer look at the stock.

Breakout of prior high AND above all moving averages

One thing I like to see is when a stock breaks out and goes above all moving averages. We can even see now that both the 200 daily and exponential moving averages are now pointing upwards. Is this neccessary for me? No. But it’s definitely not a bad thing, and the more positives the better.

Lots of people will look at stocks above 200 moving averages, and now it’ll come onto their radar. Hopefully, trend followers will get on board, and the stock will start a stage 2 uptrend.But it might not.

It’s important to acknowledge that not all trades work out, and this one may not.

I haven’t taken any profit here and instead have been on the book for more at 103-104p for the breakout retest. If I play these patterns repeatedly with good risk management then in the long run I make money.

There’s also no earnings risk on the trade, which is a positive. Trading ahead of earnings is gambling.

Positive directorspeak but more importantly in line.

I’ll see what happens here, but I feel on the retest it’s a reasonable risk/reward entry.

Best of the Best (BOTB)

Unfortunately, this stock moved before it could go in this newsletter properly.

But look at the chart and what do you see..

An almost identical chart to DOTD!

This is why I call trading a game of “pattern recognition”?

It’s the same chart:

  • Stage 2 uptrend in Covid boomtime

  • Stage 3 rollover and MAs falling

  • Stage 4 collapse and profit warning

  • Stage 1 base that is nicely extended

Here’s a closer look:

The arrow marks the recent RNS.

I’m a little annoyed at myself here as I read the half-year report and saw that the business was performing better than it was the pandemic run yet it was at the exact same price at that period… with less shares in issue!

I’m no big fundamentalist but it seemed the business was doing fine yet priced to do badly.

I was tempted to start buying but wary that the stock could be trending sideways unless other people decided they now wanted to get on board.

As it happens, they did, and I’ve paid the price to buy higher at around 500p.

I think the stock could be in for a re-rating here. But I would not buy at 600p as the stock is now +50% almost from the RNS, and so there may be a few quick profit takers. I’ll look to increase here on any stage 2 base and breakout, or a retest of the 500p mark.

However, be careful. This is an illiquid stock which drives volatile moves. Nobody was complaining on the way to 4000p but it was a crowded exit as it came all the way back and did a Grand Old Duke of York.

Immotion (IMMO)

This is a fun trade (it’s too small to do anything serious). I’m posting it here merely to highlight the absurdity.

Obviously, the stock has seen better days. And you’ll notice my alert is well above the current price!

A stage 4 mangy mutt – only the dreamers are long.

However, the other day the stock put out an RNS which appeared not to be picked up by the market.

Have a read – see if you can get the trade before reading below.

So Immotion has sold (subject to shareholder approval) the LBE business for an EV of $25,211,739.

Meaningless so far, right? Yes, because we don’t know what Immotion’s market cap is. At least, I didn’t.

But here’s the interesting part.

Intended return of the majority of the LBE sale proceeds to Shareholders (up to circa £13.5m, equating to approximately 3p per share), retaining circa £6.5m within the Company for future opportunities.

Immotion Group Proposed disposal of LBE and Notice of GM – 2 February 2023

Now, here’s the interesting part. Up to £13.5m given to shareholders. I had a feeling the market cap was pretty small so this could be substantial – especially given another £6.5m is retained within the company.

As it happened, the shares opened up at 3.2-3.3p. Now, there’s a 3p special dividend, so if we exclude that the shares will be trading around 0.2-0.3p when the stock goes ex-dividend.

But given that the stock has £6.5m and this is roughly half of £13.5m (which equated to 3p per share) then this means that the stock will have around 1.5p in cash? And it can be bought, assuming the disposal gets voted through, at 0.3p?

A quick calculation shows everything: £6.5m across 415,538,083 shares is 1.56p per share.

Now, the market might have discounted that the management are useless and likely to squander it. I’m not saying that management are useless. But maybe this is a reason the stock is down?

The alternative option is that the market doesn’t actually realise.I even pointed out that the stock would have a negative EV on Twitter.

I am long Immotion with an average position of 3.35p. I’d be a seller at 3.8p-4p for two reasons:

  • I’m happy to leave something for the next person

  • I have no idea of the quality of management, nor do I have any incentive to look, because it’s too small a position and this is a trade

Obviously, there is always the 0.000001% chance that someone with very deep pockets will buy everything they can get and then call an EGM to sack the board and return all the cash to shareholders and make a handsome profit.

But what is more likely is that the market doesn’t actually realise what ex-dividend means.

Here’s what happened in Braveheart (BRH) a few years ago.

42.75p special dividend with ex-dividend day 10 December.

Here’s what happened on ex-dividend day. You’d expect the stock to open 42.75p down and not move, because, well, because it’s ex-dividend day, and those people who were holding the stock the night before are entitled to the dividend, and those buying the day after are not. But that wasn’t what happened.

The stock opened up around the right price then rallied +100%

Punters didn’t understand what ex-dividend was. They bought the stock because they genuinely thought it was cheap. Naturally, the directors Trevor Brown and Vivian Hallam took advantage of this madness and unloaded plenty of stock.

£250,000+ dumped at a massively overinflated price thanks to punters.

And then they reloaded a few days later with options!

Nice work if you can get it.

Anyway, to summarise on this stock.

I think it’s highly likely the disposal will go through because it appears to be a great deal for shareholders.

So, I think it’s highly likely the special dividend occurs and there is limited downside at the 3.3p level given there is 3p in dividend plus 1.56p in cash. It’s also possible that punters buy the stock ex-dividend and there is revaluation to a less extreme level.

It’s not a serious position but I’m interested to see what happens.

Bushveld Minerals (BMN)

Bushveld Minerals is one of the few large scale producers of vanadium in the world.

Vanadium itself is often used as a steel additive which strengthens it. That’s about all I know about it.

But what I do know is that the price of vanadium is subject to wild swings.And with those wild swings comes wild swings in Bushveld’s stock price.

Back in 2018 the vanadium price went from $20 to $120. Yes, it quintupled.

Here’s what happened to Bushveld.

6p to 50p in six months!

However, that was the high for Bushveld and it’s never been there since. Here’s what happened afterwards.

You just know someone bought at 50p and is now more than 90% down.

Pretty grim. But vanadium is now trending upwards yet Bushveld is still at multi-year lows.

Source: investing.com

Why is this important?

Because every $ that vanadium ticks up drives significant cash flow for Bushveld.

Get this. Vanadium hasn’t actually fallen in price since August.

And here’s the cash cost of production for Bushveld.

Based on the 12m cash cost of $US27.7/kgV:

When vanadium trades at $30 then Bushveld has less than a 7.67% margin. When vanadium trades at $40 then Bushveld has makes nearly a 30.76% margin.

And at $50 – Bushveld is making a 44.6% margin.

So if vanadium has a 20% increase from $40 to $50 it increases Bushveld’s gross margin by 50% from ~31% to ~45%.

Therefore, keeping an eye on the price of vanadium is crucial when looking at this stock.

But there is one drag on the price.

$65m CLN matures in November 2023

This is a big uncertainty on the stock. One would hope the lender would not be punitive but you never know.

If this uncertainty is resolved then I feel the stock could move. But if vanadium starts moving I wouldn’t be surprised if Bushveld followed. It’s worth watching for these reasons.

Renalytix (RENX)

RENX is a classic Grand Old Duke of York.

All the way up.. and all the way back down! Shares are for buying and selling.

I can’t argue with that chart. But it would appear I may be able to argue with the colossal amount of cash burn. $12 million in three months ended September 30, 2022.

Check the cash position.

Cash and cash equivalents on that date was $31m – but if we extrapolate the $12m across six months then suddenly the balance sheet isn’t looking too clever.

Especially when you look at the cash flow statement.

$45m burn in 12 months

The recent RNS is not all as it seems either:

The total budget of the project is $10 million over a projected five-year period with approximately 10% of the budget targeted for commercial translation activities to be undertaken by Renalytix.

Renalytix And Partners Awarded $10m Grant – 26 January 2023

Unless revenues seriously ramp up (revenues were $3m in 2022) then as much as I like the chart I can’t help but feel the cash position is running low and therefore there’s a risk of a placing. It may be a better option to take the placing if there’s a catalyst for the price to move.

I’m going to tell my brokers to keep their ears open and will probably wait until this uncertainty is removed. With so many other shares, why do I need to take unnecessary risk?

Naturally, now I’ve opted to leave the stock, it’ll now go on a massive bull run.

Music Magpie (MMAG)

Here’s a stock that I’m no longer currently holding. But the chart does look interesting.

It was a classic Covid float that bombed and fell from 160p to as low as 6.6p. Again, notice the monster volume and capitulation days at the absolute bottom.

Monster volume can be a great way of spotting potential bottoms.

We then had reasonable director buys.

Directors sell for all sorts of reasons but they usually only ever buy for one. Nobody is forcing them to.

I missed the initial rally but bought into the 50 EMA support with a tight stop then increased on the breakout.

40p seemed like natural resistance so I took the position off from 37p.

I’m wondering now if I made an error of selling too early. The classic signs of strength are there – capitulation bottom, director buying, stock bounces on ever dip..

We’re now potentially seeing the 200 EMA about to be tested for the second time.

I’d like to see some sideways trading first as the stock has rallied hugely in the last six months but at £46m market cap there’s still potential for a move.

Lessons learned

The market always teaches you something.

Sometimes you’ll be lucky/unlucky

I was close to pulling the trigger on 888 Holdings (888) but I wanted to see how the stock closed. It failed to stay above the breakout level. And lucky for me!

Bad news the day after.

The day after there was bad news in the stock and it got smacked. It would’ve been a bigger loss than anticipated. Sometimes these things will happen. Just accept it and remember that sometimes you’ll be long and get unexpected good news.

In fact, if you trade well, you’re more likely to get surprise positive news.

Selling the expected news is often a positive EV (Expected Value) trade

Take a look at BSFA Enterprise (BSFA).

I was long here as the stock broke 14p.

Nice uptrend, monster volume, good trade to be long with tight stop.

Clearly, there is some hype around the stock, as the news that kicked it off was rampy.

“..one of the world’s first 100% cultivated meat fillets to be produced”. Check the second highlight.

The company had telegraphed to the market that it would be by producing a larger scale prototype.Therefore, the market was expecting it.

Usually, expected news is sold into. That’s exactly what happened here.

Classic exhaustion gap.

I dumped the whole position into this spike and we can now see the stock is trading below where it was prior to the news.

Yes, there’s a chance it could’ve mooned and gone 300%. Crazy and illogical things do happen.

But in my experience, going for the home run trade often leaves you being batted out (is that the baseball term? Probably not).

I’ve always found it better overall to sell when people are hungry and wait for the excitement to settle.

Ending note..

Thanks for reading!

And again, Buy The Bull Market is still a work in progress. I want to know what you want to see.

I’ve added a list of stocks for easy reference below which I’ll add to each month. That means there will always be a library and an easy way to check if 1) a stock has been mentioned, and 2) when it was mentioned.

Finally, I’d be hugely grateful if you can tweet about Buy The Bull Market. I’ve never ran ads and so my business is heavily reliant on word of mouth. Any support is hugely appreciated.

The March edition will be out on Tuesday March 7th.

Have a great month. Play tight!

Stock library

List of stocks mentioned: 888 Holdings – 888

AO. – AO World.

ATM – Andrada Mining

BMN – Bushveld Minerals

BOTB – Best of the Best

BRH – Braveheart

BSFA – BSF Enterprises

DOTD – Dotdigital

IGR – IG Design

IMMO – Immotion

JET – Just Eat Takeaway

MMAG – Music Magpie

NGHT – Nightcap Group

RBG – Revolution Bars Group

RENX – Renalytix

RNK – Rank Group

ROO – Deliveroo

The post What’s your edge? first appeared on Buy the Bull Market.

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