How I Look For Ideas Part 5 - The Veteran - (Macro Catalysts)

As we have seen in previous articles I use a combination of technical analysis and screens to look for opportunities in the market.

This allows me to identify stocks that are behaving differently to their peer group i.e. they may have been left behind or run too far relative to the market.

In the past, I have likened this process to looking for exoplanets...

Let me explain.

Before we had enormous ground and space telescopes, astronomers would look for telltale signs that a planet might be orbiting a distant star.

One of these signs was a wobble in the star as the invisible planet orbited the fiery sphere.

Clear?

Wel that’s what the screens and models I use are looking for... 'wobbles' in the price action or differences in behaviour.

These wobbles are akin to ripples on the surface of a pond.

Imagine the pond as the surface of the whole market.

The ripples in the surface tension tell us that something is just below, but we can’t be sure what it is...

That's where catalysts come in.

A catalyst is an agent for change, an element that creates a chemical reaction when introduced into a previously stable environment, and in our analogy of ponds and stars, it shows us what’s been hiding under the surface.

Catalysts come in various forms where the markets are concerned.

They can be macro in nature, big picture items that change the story or narrative for the whole market: Central banks, interest rates, monetary and fiscal policy etc.

As we have seen over the last 12 months even fundamental drivers such as these (which make up the very fabric of our markets and economies) can have their own external influences or catalysts for change.

If we drill down further we find other catalysts such as index or sector-specific economic data: consumer spending & retail footfall, or the tax treatments of specific goods and services.

Let's use the example of the current stamp duty holiday for UK homebuyers.

Over the last 10 months, housebuilder Barratt Developments (BDEV) has traded a range of 349.40p to 720p.

Macro Catalyst

Low-interest rates and the stamp duty holidays have arguably driven the lions share of those gains, not just for BDEV but across the whole sector.

We also have factors or influences that are not transitory such as exchange rates and sensitivities to them.

The FTSE 100 earns more than 70% of its revenues abroad - the sterling exchange rates are a direct influence on many of its constituents.

A weaker currency makes goods and services priced in sterling cheaper to foreign buyers.

The chart below is the FTSE 100 versus the GBP trade-weighted index over the last 12 months

In the past the FTSE has moved in the opposite direction to the UK currency, although that relationship may have dampened slightly.

However, the fact that the pound has risen 20% from its 52-week lows against the US dollar may help to explain a chunk of the FTSE 100s under-performance relative to both US and other European equity markets in that period

If we drill down further still we can find stock-specific catalysts - these can take the form of earnings or trading updates issued by the company, contracts wins, broker upgrades or downgrades, M&A activity and insider trading, and I don’t mean blue horseshoe loves Annacot Steel  (Wall Street the movie) but rather informed buying or selling from within the business.

For example, back in September 2020 a chap called Henry Samueli bought almost 102,000 shares of US technology company Broadcom at $361.45 a share investing $37 million into the business.

How do we know that? Well, Mr Samueli is director of Broadcom.

Actually, he was the founder of the original company and part of the team that sold the business to Avago for $37 billion back in 2017.

He is someone who knows the company, its business and markets backwards.

So if he was buying the stock in size, then that’s something to take note of.

In the chart above I have highlighted a hammer formation in Broadcom’s price action, That candle, which signals that the market is beating out a bottom, dates the 21st of September.

The same day that Henry Samueli’s purchase of stock was disclosed.

Broadcom closed at $351.79 that evening and on Friday last they closed at $465.36 and gain of almost 33% in less than 5 months.

The perfect example of technicals and catalysts combining to make a compelling trade.