Trading with Focus – When retail money gets sucked out of the market
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Have you recently noticed that being ‘in the market’ is not enough to make money, and that former market darlings are not giving you the 10-bag payoffs that you were promised by your OLA driver that one time?
Have you noticed the number of postings on chatrooms about speccy stocks have dropped significantly, or certainly, that the tone has become more desperate?
Have you noticed that the good announcement (that everyone was expecting) doesn’t automatically deliver an immediate payoff?
Have you noticed that former market darlings that were going up due to big revenue growth (with no profits) are now starting to struggle even though their revenues continue to grow (yet still with no profits)?
Well, my friends… this is what it feels like when the wave of first-time investors – with next to no investing experience and a greedy sparkle in their eye rush into a stockmarket to chase quick gains, and then that wave goes back out.
With Covid on the doorstep, a super fund withdrawal in their bank account and certain marketing-heavy data-lite apps with nowt but a buy/sell button, every stock was being re-rated upwards. And now maybe there are some burnt fingies.
Professional investors and longterm suffers (like yours truly) sighed a sigh of relief early on as every dog they were holding, regardless of flea-content, were recovering all of their multi-year losses and were turning into ‘quality’ investments. We didn’t ‘buy in’ to the bounce, we were already holding! And looking for an exit.
Having been through a few different cycles my biggest mistake this time was (once again) being in total disbelief and mistakenly thinking there was a need for fundamentals in a retail wave. For a while there it didn’t matter – in fact, the more outlandish, the more dodgy the management, the more unbelievable the claims the better.
Sure, a computer chip that learns. A company-making discovery with one drillhole. Surely there’s room for 30-odd BNPLs as credit cards and saving money are dead. Hell, why not roll out some of the landlocked iron-ore mines again, even the magnetite!
But, like any wave it goes back out and if you are still riding it all-in when it does, and if a strong fundamental or profitable company isn’t there to catch you, then you go back with it. All the way to pre-Covid levels or below.
There’s always a trade-off for the management of small, unprofitable companies that need the stockmarket for its primary role – ie: to raise capital.
On one hand, you want to attract good quality investors. Large institutional investors that will support you each time you need capital, invest for the longterm and that aren’t spooked by day to day movements of the share price.
The downside of these guys is that they rarely buy on-market. Many of them are mandated to only buy into companies through capital raises, as it allows them to get a big enough stake to justify, at a discount to the market and without moving up the share price.
But that means they don’t ‘support’ the share price as much as they support the company, and the share price can get boring causing many retail investors to worry that they are missing out on gainzz by staying, so they leave.
On the other hand, you have ‘you lot’ (including me!). Retail investors, attracted by shiny things wanting to get rich quick. Mostly we are driven by greed and fear. So mostly, in the smaller companies, the day-to-day movements in the share prices are determined by little traders.
Not bots. Not fundies trying to push the share price down so they can rebuy cheaper, but your mate from OLA proverbially sh*tting himself that the share price will drop further by the time his mortgage repayment comes due.
Let me show you a couple of examples. The names have been removed from the charts to protect the innocent and keep me out of court for slander, but I am pretty confident you’ll get the point (anyone that guesses the stocks correctly can have 4 weeks of free live-streaming data to the value of $45).
In retail land, everyone looks for themes and the next big thing. All of the other BNPLs only went nuts because that first one did, not because they make any profit. When there’s a big oil discovery everyone starts looking for the next oil driller, not that many find oil. Ditto with any other commodity or cure or whatever. It’s the difference between being an investor and being a speculator. Going long on red at the cazz when red comes up a few times in a row!
These two companies in this particular mob are exposed to the same metal. That particular metal has some loose affiliation with some new uses in this new technological world we live in and may also be something you’ll be able to exchange for food if the world comes to an end. So there is (or was?) a lot of hype around it, and there is also a lot of expectation that it will be (or would have been …) worth a lot more soon, because the end of the world is coming or some such.
But it’s all been said before…
I’m not going to argue about fundamentals, or which is better, this is primarily to highlight the retail effect. After the Covid-related bounce, everything went up including these guys, but there was also a big spike in the price of the underlying metal, and then the talk of the ‘next spike’ being ‘the big one’.
That didn’t happen, and in May/June there was actually a downleg to that metal price.
The company above had a larger percentage of exposure to the metal in question in the make-up of its drillcores than the company below, so it attracted a lot more retail interest even though it was significantly earlier in its development.
The one below took in a lot of retail money early on in the rally, but peaked earlier as the stream of coming announcements were not deemed as exciting as the one above. And with people looking to maximise their returns, they soon shifted to the one that was ‘doing better’, which in retail speak apparently means ‘is better’.
The clowns on a certain chatroom I can’t mention here were convincing other clowns to switch out of the below into the above primarily on the basis of the above ‘doing better’. In other words, buy high because the past performance was better.
And in doing so, they were switching out of something with less retail investment into something with more, and the outcome was a 30-40% loss instead of the marginal downside of a sideways moving stock as greed overtook brains once again, when the underlying thesis did not play out.
But each company has their own pros and cons. Both are affected by the underlying commodity price, and each were a better investment at a certain stage of time, and their future is yet to play out. So it was all speculation and this race has more to run.
But. If you have a look at the point in time in which the underlying commodity started to get whacked in May/June, and did not get the massive re-rate that was touted, there are two very different stories. Not all of it can be attributed to the underlying commodity, but in my view, this is a good example of the pullback in the retail wave.
So now, if you consider what all this means, as well as worrying about global economics, the pandemic, China, the Taliban, the share price and the fundamentals, you will need to worry about the make-up of the share register, worry about the amount of promotion they do and worry about the amount of hype they put into their announcements.
Long story short, the bigger the wave the harder it can pull back.
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