Trading the Trend - 'It's a bull market, you know!'

As more and more companies release results, it appears that maybe, just maybe, things are not as bad as they seem. 

In booming times, companies load up on debt, have too much middle management who may or may not manage something, and are generally carefree when it comes to costs. 

In desperate times, companies start hacking and chopping away at the excess fat and trimming the workforce. When cash suddenly matters, it’s amazing how many companies are able to suddenly downside and slash expenses yet were seemingly unable to do so before. 

This does, however, work both ways. I recall in a university textbook about corporate mergers the story of a chap in IT support, who found himself in the unfortunate position of being made redundant. The company – or rather the decision maker – deemed that he was surplus to requirements and so he was to be let go. 

Unfortunately for the company, this then had a terrible effect on the remaining IT support team, as they were then overrun and unable to cope, which in turn affected the group. This cost saving actually turned out to be cumulative cost due to the loss of productivity elsewhere. To make matters worse, the company asked the previous employee to come back to his old job. He agreed, but only if he was to come back as an external ‘consultant’ – meaning he got paid a lot more money for doing a lot less work. Some things are best just left as they are.

It's something for the investors amongst us to think about, as companies can all too easily start cutting bone instead of fat. 

But what does that mean for traders? 

Well, if companies have expected much worse and taken drastic measures, then it could be that they are doing better than expected. And if they’re doing better than expected, then it is likely that the prices of stocks will continue to rise. Especially as bonds and other asset classes are so unattractive. 

If we look at the last two crashes, the Great Financial Crisis of 2008 and the Coronavirus collapse in 2020, anyone could be forgiven for thinking that the stock market (overall) isn’t allowed to go down. 

The banks were bailed out in 2008, and now we see an unlimited amount of money authorised to be pumped into the market. So with that in mind, stocks are looking relatively attractive.

An example of a stock beating its expectations today is Scapa (LON:SCPA). I was filled in the auction at 105p and banked at 120p – it’s now threatening 130p. It could go even higher, although I know nothing about the company. But what I do know is that stocks that beat expectations usually see a positive response from the market. 

Naturally, the company could’ve guided those expectations to the market right down, knowing that this sets them up for a good chance of a beat. Which brings up the question: is it a real beat? Today’s price response shows that in this example, it doesn’t matter.

Anglo Asian Mining (AAZ)

Gold has been a big talking point in recent weeks. It has smashed through the $2,000 mark, and there is much talk about it being ‘extended’ and overbought. Short term, that could be true. But when price does something it hasn’t done in many years then it is a sign of things changing. As Old Turkey said in one of my favourite books Reminiscences of a Stock Operator: It’s a bull market, you know!

This was in reference to potential retracements along the way. No price goes up in a straight line, and stocks will continue to gyrate both ways whichever trend they may be in.

I hold a long position in Anglo Asian Mining (LON:AAZ) , and I would like to add to this position once it breaks out of the all time high. Jack has written an excellent piece on Anglo Asian Mining here, and it was his article that convinced me to take a small position to monitor. As the stock looks to break out, I’d like to take a serious position. If the gold bull run is going to continue, then being long a highly cash generative and low-cost producing miner doesn’t seem like a bad idea.

AO World

AO World (LON:AO.) is a company that is an online only retailer has struggled for many years. At least, I assume that that, because it listed at around 400p in February 2014 and sunk as low as 50p earlier this year. However, look at this chart.

In May, we saw a stunning breakout and ever since volumes have been higher than the previous average. The stock has not given much back on signs of dips – a clear sign of accumulation and buyers picking up loose stock. I like charts that don’t dip much and show strength, and although there was a big red candle the stock is now pushing those highs again.

As I write this, there is an iceberg being worked at 170p. I’ve picked up a few today and therefore hold a long position in this stock, and I’d want to increase this as the price moves through that recent high. 

I noticed that the employees have been well incentivised. If, over the next five years, the share price hits 941p some will be eligible for a one year’s worth of salary pay-out, and at 1255p they could receive 18 months’ salary. It’s nice, and not impossible, although it’s unlikely I’ll be holding for five weeks never mind five years! 

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