It has now been a month since my last article ‘An Opportunity for Commodities’ (March 30, 2022) and those who have followed me in Anglo-Eastern Plantations (AEP) at 757p potentially well done. I say potentially, because the share price crashed from 930p to 770p in less than half an hour of trading last month following the announcement that Indonesia would ban oil exports from webbed.
This meant that the company would not be able to reach the lucrative international prices and long and short traders were selling the stock in a hurry.
Always be wary of change. For example, governments may decide they want the product for themselves and take action to conserve it. The problem with government risk is that no one ever seems to think it can happen, until it actually happens. Ask shareholders to Evraz (EVR), where oligarch Roman Abramovich held a large stake (now suspended), or Petropavlovsk (POG), down about 90% since the start of the year.
Commodity stock trading involves all kinds of risks. It is important that anyone trading commodity stocks (and indeed any other stock) be prepared to lose 100% of their position. Is it likely? No. But can this happen? Absolutely. We’ve seen FTSE 100 companies fall out of favor in just days.
Looking at Chart 1, we can see the AEP intraday price chart. I marked an arrow as to when the news hit the market about the CPO export ban, and we can see that it took some time before the market reacted sharply lower.
The stock then rallied sharply as traders moved in to buy the oversold rally, before falling back. This volatility is typical because the price was discovering a new range, after digesting new information.
Those who waited with alarms for the RNS announcements did not receive a notification as this news was not released to the market through the RNS – that’s why stop-loss orders are crucial to get you out of a position . That said, one of the reasons for the sharp drop could also have been a stop-loss trigger. This is one of the downsides of placing real stops in the market, but if you’re not in front of the screens throughout the day, using stop-losses can be an effective way to hedge your risk. of decline. As with all things in trading, this is a discretionary decision that depends on your own unique situation.
Another theme that I think we will continue to see play out is that of lower consumer discretionary spending. We are seeing more and more indications that the reduction has already begun – with the recent article by IC’s sister publication, the FinancialTimes on the cancellation of streaming services (which preceded Netflix’s profit warning by days) and polls showing consumer confidence near an all-time low.
There are many ways to negotiate this. Leisure and hospitality are the obvious choices, along with retailers and even gyms. Everything the consumer may notice when looking at their bank statements is in the crosshairs – and zombie members who join gyms with noble intentions that aren’t followed through will surely be looking to finally quit.
A good way to negotiate this is to look at sectors and identify weak companies or companies with poor balance sheets. If you are not comfortable picking individual companies, you can create a basket trade and take short positions in several stocks in the sector. The downside here is that your commissions will be increased, but account volatility will be reduced. This is important because if a company beats its market expectations and rallies sharply (or even tightens – it happens), your exposure will be reduced because it is part of a basket of stocks.
A stock that I have added to my short sale watch list is Deliveroo (ROO). I am a regular customer of this company as they deliver groceries within half an hour, although the markups do not go unnoticed. This is where Deliveroo makes its money – adding to the price of anything ordered on the app and taking it as commission.
For example, it’s cheaper to go to a restaurant and eat than to have food delivered, as long as you don’t consume a lot of drinks. Deliveroo Plus offers customers a monthly fee in exchange for no delivery charge – this reduces friction on customers who pay a fee for each delivery and thus encourages them to order more as mark-ups are not shown on the invoice final. It’s a good model and the business continues to grow, but I think it may see some cancellations as the belt gets tighter.
There is, of course, the argument that, as Deliveroo takes a percentage off the total order, its revenue will actually increase as supermarkets and restaurants raise their prices.
But it also means that the price via Deliveroo will increase more in proportion to the actual cost increase. Obviously, the best time to sell this stock was near 400p, not when it took a near 75% swim at 110p.
But shorting the all-time low worked well (top arrow) before, and the trend is clearly down. There is also a large round number at 100p – this is a psychologically strong level. The down arrow marks this support and I would be tempted to go short if the price fell through it.
Deliveroo is again traded on SETS and therefore benefits from the electronic order book; it’s liquid and relatively easy to get in and out. This is an advantage when selling short because depending on market makers to exit a position means you are at the mercy of their prices. With the order book, you can become the market maker and post a price and size to the market.
Finally, I would look at the closing price here. It is common for stocks to fall through support or break through resistance during the day and then pull back at the close. This means I will be watching for a Deliveroo closing price below 100p as I believe this would give a stronger signal.