Miners Turning To Tech - 1999 All Over Again?
While the broader ASX 200 index has produced very little return over the past two years as miners have offset the gains seen in US dollar earners – even bank share prices are no better than two years ago – there is one area of the market that is beginning to froth. Micro-caps and in particular small miners, that are turning to buying technology companies in a bid to divert their business away from the resources collapse.
Back in 1999 this was a very common theme as well, where many miners announced a move into technology which at the time typically spelt setting a business that built websites. It seems ridiculous now that such a mere statement of a move into something so basic as website building or anything “Y2K” related would warrant a massive increase in market capitalization but that is exactly what occurred. I recall many speculative miners making this change but one resonates with me all these years later – First Australian Resources (FAR).
Below I show a monthly chart of FAR and following a dismal performance in the share price in the preceding years, in early 2000 they announced an intention to move into technology. Not a move but an intention. As we know now this never occurred but that didn’t stop speculators driving the share price from 8c in January 2000 to 42c by March 2000. It fell back just as quick.
We are beginning to see similar circumstances appear again with a failed mining boom triggering management to consider alternative options and industries. One clear thematic is mining companies looking at “disruptive technology”. For those that don’t know what the term relates it, it in basic form is new technology that disrupts our normal way of doing things. Think Uber for the taxi industry, AirBNB for hotels, Facebook for traditional media advertising and so on.
From the 1999 experience this optimism, euphoria or plain stupidity can carry on for many months and while looking back at history would suggest not to be involved in such frivolous market action, this is a unique opportunity for those nimble enough and to an extent brave enough. After all, a great reward of 200-500% returns doesn’t come without volatility or risk. However, there a few basic techniques that can be used to trade these “penny stocks” as they are called in the US to reduce risk and give some idea of when to exit.
Before we get onto any of these techniques let’s look at a few recent examples. I begin with Aziana – formerly a gold company with some bauxite operations - that announced they had acquired an option to purchase a Brainchip. Brainchip is effectively a supercomputer chip that has the ability to process data thousands of times faster than anything currently on market today. Yes, faster than Intel, IBM and all the rest. Great claims but difficult to verify by investors. Nonetheless the excitement this company generated is nothing short of outstanding and the share price ran from 2.5c in March to as high as 62c in May! Amazing how excitement and share price gains feeds others excitement to buy more at higher prices.
A second example and more recent example is Potash Minerals (POK) obtaining an exclusive option to purchase the data platform Buddy Platform. The buddy platform manages the data that is created by devices interacting with each other (internet of things) and then makes that date useful to a wide range of companies. As a result POK has rallied from 4c last month to as high as 22c just over a week ago.
A more recent example of another stock on the move is Aleator Energy (AWD) which again as a mining company has now exercised its option to purchase the Vonex business which has an app that allows subsrcibers to communicate to any other mobile platform. Think Skype talking to Viber or Whatsapp etc. No longer will a Skype user only be able to talk to another Skype user. I recommended this one to our tradeideas.com.au readers at 1.4c a fortnight ago given the low risk it presented when the minimum capital raising would be no less than 2c. The stock has since run to over 3c and could easily still head higher now that AWD is exercising their option on Vonex that currently receives revenue of $400K a month.
There are more examples of such miners turning to tech but lets now focus on some basic techniques to manage such trading of these “penny stocks”.
Firstly, we need to identify what the business being bought actually does. Be careful, every business will sound great! Will this business really be successful? Consider the terms and at what price any capital raising will occur at this could help identify whether the share price will rally strongly or flounder with substantial overhang.
Secondly, we need to respect the price action of the chart. Don’t fall in love with the story. 99.9% of these companies will end up being worth almost zero again. You have to be prepared to sell and sell quickly if the tide turns. So how can we tell when the tide is turning? Given that share prices can surge into the stratosphere, normal technical indicators and techniques that determine where overbought and oversold trading conditions (known as oscillators) will be useless. Overbought readings on indicators like the Relative Strength Index (RSI) and Stochastics can persist for long periods and can see you selling too early.
I believe one of the most effective and basic methods is to use a trailing stop loss based on a 10 day exponential moving average (EMA). This is particularly helpful for those that don’t watch the trading screens all day long. Put simply when the price crosses the 10 day EMA – sell. For those that possess a little more bravery you can wait to see if the share price closes under the 10 day EMA. Sometimes we see an intraday break but then the price recovers and the share price continues on. This is happens in a few cases.
If we go back and consider AZK the exit price would be 27c. Good enough for a 500% return. The stock is now 15c. POK exit price would be 14.5c – where it is now but a solid 350% return locked in. AWD is still above its 10 day EMA but gains are in excess of 100% so far.
We find that if a trend is really strong and healthy then we typically see price remain above the 10 day EMA. Even in short term trading across large-cap companies. With speculative stocks it’s even more important to respect these EMAs.
With over twenty years in proprietary trading it seems I have now seen markets come full circle and although the characters have changed, the story hasn’t. And neither have the most effective and basic techniques to trade them successfully.
Greg is the Head of Proprietary Trading at Global Prime and has over 20 years of experience as proprietary trader and high level strategist for the major investment banks including Citigroup, Bankers Trust and Macquarie Bank. He has been involved across all asset classes including commodities, bonds, currencies and equities right across the globe.
After a 10-year career within the comforts of the large investment banks and research firms he branched out on his own to form his own proprietary trading firm successfully building the business into a multi-million dollar trading operation that turned over a billion dollars a year. This same team now runs the proprietary trading desk at Global Prime, risking their own money in line with the firm's and client's capital.
Greg has appeared on CNBC, Channel 9 - Business Sunday programme, a guest columnist for the Australian Financial Review, a regular author for Personal Investor, Wealth Creator and Shares magazine and is the former Treasurer of the Australian Technical Analysts Association.