After the initial euphoria in banking stocks over the less punitive recommendations (other than mortgage broking sector) from the Haynes Commission, profit taking is finally happening with the banks. A sideways movement is expected in lacklustre fashion on the local market in the months ahead, although selected stocks failing to meet guidance or lacking profit progress are likely to face significant headwinds. The case in point today is Praemium (PPS) which dropped 17% today.
I will be watching a few stocks with interest, namely XRO, CLV and MYE. CLV is making a move today. Otherwise still keeping powder relatively dry.
The S&P500 in the US is facing some resistance at the 200 day MA and this week’s movement will likely dictate market direction in the weeks ahead. On balance of probability, I am inclined to think it is more likely to head south.
Regardless of what the markets do on a day to day basis, we need to acknowledge two things. First, the global economy has turned down- what does that mean? The best days in stocks are over as earnings will come under pressure and we should expect companies to turn to cost reduction to improve their bottom line. The Baltic Dry Index chart below which provides global shipping bellweather has turned drastically down and is a sign of global economic deterioration. Italy has entered recession. The warning on global economic downturn suggest a high risk to reward ratio is now in play. And unless you are a great stock picker, on balance, the probability stacks against you in this market, i.e you are more likely to lose than win in it. Secondly, even if you are a great stock picker, any good stock in a day can be subjected to a downward re-rate despite having been a good stock performer in the last 1-2 years, you just need to see what happened to ALL and RMD and PPS today. Despite indices moving higher, most stocks except for resources, banks and gold, have actually been doing badly despite the January recovery.
And on the microcap front, yes more CR (capital raising) in play as companies are running short of cash.
I cannot emphasise enough the dangers of single stock involvement especially in the microcap space. And I am talking about people with hundreds of thousands in single stock that has already underperformed and will continue to do so in the months ahead. It is time to take stock and reduce risk. The corporate governance amongst microcaps are sadly not at par with the blue chips (even these have issues e.g the banks and insurance sectors). And I am amazed that these microcaps can consider making acquisitions of companies that are not profitable to add to their loss making positions, by issuing more shares to their already bloated share base.
