Lifting the veil on this golden rule

Monday, 18 November 2019
Adelaide, Australia
By Bernd Struben

  • ‘Incredible pockets of value’
  • Beyond SAFE
  • Break even…or make money…
  • Mean Reversion Explained

If there’s one golden rule I’ve learned about investing, it’s that there is no golden rule.

What works in one market, won’t necessarily work in another.

A strategy that delivered massive stock market gains in 2007, likely led to massive losses in 2008.

That doesn’t mean there aren’t successful strategies you can employ to minimise your risk and boost your returns. But it does mean you need to remain flexible. Market dynamics change constantly. When it comes to your investing tactics you’ll do well to keep an open mind too.

For example, you’ve probably heard the old investor adage, ‘Don’t try to catch a falling knife.’

It’s meant to warn you off buying stocks suffering falling share prices. Instead many analysts — including some of our own editors — recommend waiting until a sell-off runs its course. Then buying in once an uptrend is confirmed.

It’s the ‘buy high sell higher’ approach. Rather than the ‘buy low sell high’. It aligns with another of the so-called golden rules, ‘The trend is your friend.’

Now there’s certainly some wisdom behind this.

Just because a stock is down 20% over the past month doesn’t mean it’s good value today. There are any number of reasons the stock could be selling off. Bad management, a failed product, excessive debt, competitors nipping into their market share…any of dozens of factors could see the stock keep heading lower. Some go all the way to zero.

But in the same vein a stock that’s steadily trending higher could see its share price collapse for an equally lengthy list of reasons. This is a case where, ‘The trend is your friend…until it isn’t.’

Which is why it’s so important thing to keep an open mind. That means understanding why a specific stock has been trending higher or lower. And studying the broader market demand and growth outlook to see what kind of rebound potential it may have. If any.

And that…in a roundabout way…brings us to today’s topic.

The share price rout in pot stocks.

We’ll get back to that right after a look at the markets…

Markets

Over the weekend, the Dow Jones Industrial Average closed up 222.93 points, or 0.80%.

The S&P 500 closed up 23.83 points, or 0.77%.

In Europe the Euro Stoxx 50 index closed up 22.80 points, or 0.62%. Meanwhile, the FTSE 100 gained 0.14% and Germany’s DAX closed up 61.52 points, or 0.47%.

In Asian markets Japan’s Nikkei 225 is up 92.55 points, or 0.40%. China’s CSI 300 is up 0.80%.

The S&P/ASX 200 is down 37.22 points, or 0.55%.

West Texas Intermediate crude oil is US$57.80 per barrel. Brent crude is US$63.34 per barrel.

Turning to gold, the yellow metal is trading for US$1,468.87 (AU$2,155.35) per troy ounce. Silver is US$16.99 (AU$24.93) per troy ounce.

One bitcoin is worth US$8,496.61.

The Aussie dollar is worth 68.15 US cents.

‘Incredible pockets of value’

Getting back to falling knives…and what to do about them…

With rare exception, the share prices of cannabis related companies — or ‘pot stocks’ — have been in freefall this year.

To give you a better idea, below you can see the performance of the MJ Pure Play 100 Index going back to August 2018:



chart image
Source: MJ Pure Play Index
Click to enlarge

The index tracks the returns of 100 leading cannabis companies across the globe. So it’s a decent benchmark to measure the overall pot stock sector.

As you can see, the trend has been nobody’s friend…short sellers aside.

Year-to-date, the basket of top pot stocks is down 46.5%. Since its recent peak on 14 October 2018, it’s down a gut churning 72.2%.

With a brief exception during the run between Christmas and early February 2019 — when the top pot stocks gained an average 60.4% in less than 40 days — this has been a falling knife to avoid.

But with the dust clearing from the latest round of sell-offs on disappointing third quarter earnings results, it may be time to reconsider.

Aurora Cannabis, for example, dropped 18% on Friday. Shares are now trading near their lowest price in two years.

And Aurora Cannabis isn’t alone. Third-quarter results from big players like Canopy Growth, Tilray, and Cronos Group all saw the companies’ share prices fall.

Could they — and other pot stocks — have further to fall?

Certainly. But the worst of the slide looks to be behind them. And the case for upping your exposure to the cannabis sector…or getting in for the first time…is getting stronger.

From Bloomberg:

For the first time, with stocks at such low levels, “there’s incredible pockets of value in the space,” said Justin Ort, chief investment officer for the Measure 8 Full Spectrum Fund, which invests in cannabis. “But the Street’s not willing to see it right now.”

What would get share buyers’ attention, Ort said, is legislative easing in the U.S., including passage of the SAFE Banking Act, which would pave the way for financial institutions to do business with cannabis companies and bring large institutional investors and U.S. capital markets into the fold.’

With marijuana still illegal under US federal law, institutional investors are currently prohibited from investing in pot stocks. The listed sector has been almost entirely funded by retail investors.

But that could soon change.

The US House of Representatives passed the SAFE Banking Act on 25 September. It’s now waiting for the Senate’s vote. And from there, if it passes, it’s on to Trump for his signature.

The SAFE stands for ‘Secure And Fair Enforcement’. And the act would, for the first time, enable US banks to legally engage with cannabis businesses. That in turn would open the door to billions of dollars from institutional investors.

Beyond SAFE

Beyond the potential passage of the SAFE Banking Act, the global march towards marijuana legalisation continues. The growth outlook for the medicinal and recreational sectors is massive.

To date, 21 nations and 34 US states have taken steps to partially or fully legalise cannabis. 10 more US states are debating legalising cannabis to varying extents next year. In Pennsylvania, lawmakers are considering giving the green light to legal recreational use. That would make them the 12th US state to take this step.

But one of the biggest potential game changers flying largely below the mainstream media’s radar is Mexico. The nation of 125 million people could soon become the third country in the world — along with Uruguay and Canada — to fully legalise marijuana.

That move alone could put a rocket under the best placed pot stocks.

And when I say rocket I’m not being hyperbolic here. Don’t forget that between February 2016 and October 2018 the MJ Pureplay Index shot up 838%. Some of the smaller stocks gained far more than that.

And the stars look to be aligning for the next big run higher.

Over at Australian Small-Cap Investigator, Sam Volkering’s leading pot stock recommendations haven’t been immune from the recent sell-off. But with an eye on the huge growth potential ahead, he’s maintaining an active buy recommendation on all four of his top small-cap cannabis plays.

You can get the details here.

Break even…or make money…

Below trading veteran Murray Dawes share’s his latest tips and insights.

In his premium stock trading service, Alpha Wave Trader, Murray uses his proprietary ‘slingshot method’ to focus on extracting rapid fire profits from stocks while minimising risk.

Today he takes you through some of the technical analysis theory he uses before making any trade recommendations. Specifically, how to use mean reversion to build up positions in stocks that have an outcome of either breaking even or making money.

You can scroll down and click on the image below to watch Murray’s latest video now.

For the inside scoop on Alpha Wave Trader click here.

Cheers,
Bernd


Mean Reversion Explained

[Click on the picture to watch Murray explain how novice traders get shaken out of their positions on a regular basis. Murray teaches you how to spot these set ups and how you can profit from other people’s mistakes.]

Trading the markets can be daunting at first. So many stocks to choose from. So many different opinions thrown at you every day about the chances of the market going up or down.

Sorting the wheat from the chaff can be difficult.

My own path to creating a solid trading strategy has been based on years of direct observation of markets. I spent years on the futures floor in Sydney watching every single trade.

The futures floor closed many years ago but the experience of standing at the coalface of trading had a profound effect on the way I view price action.

One of the main things I learnt on the trading floor is that prices gravitate to volume. If the locals (private traders trading on their own account) sensed that stop-losses were close by, you could bet they would try to find them. It was money for jam for them.

The same thing happens today but instead of private traders on the futures floor it is High Frequency Trading (HFT) algorithms run by the big investment banks that shove prices around setting off as many stop losses as possible.

Instead of being a victim of the HFT traders, it can pay to understand what they are doing and use it to your advantage.

To take advantage of the opportunities that occur as a result of novice traders being shaken out of their positions you need to understand how mean reversion happens.

I explain it for you clearly using diagrams in the video above.

You will learn that prices have more false breakouts than breakouts. The false breakouts in either direction suck the bulls and bears into bad positions before shaking them out. Whether trending or rangebound, prices will tend to gravitate back to a central point of control (POC) where most trading occurs.

When you learn how to spot this type of behaviour you can set yourself up in great trades where you take part profit as soon as prices hit the POC. You then adjust your stop-loss to a level where you will either breakeven or make money from that point forward. Once you are in that position you completely relax and can sit back and see what happens from there.

Regards,

Murray Dawes,
Editor, Alpha Wave Trader