Trader’s Café With Zak Mir: The Week In Small Caps, Sunday 5th February 2023

Record Levels

The FTSE 100 hits an all-time high, and to celebrate the Americans shoot down a balloon, last seen in The Prisoner series. Who would have thought it, the record high, not the balloon? Well, practically no one apart from perhaps a veteran chartist, or someone who does not mind going against the grain?

In fact, it did appear that the UK index could go over the top in August. There was a golden cross set up between the 50-day and 200-day moving averages, as we have had in recent weeks. However, there was a final autumn dip towards 6,700. It would appear that double-digit inflation, war, recession and the threat of a nuclear holocaust were the rather thick wall of worry the market needed to get to a record level.

The Doomster Narrative

But going back to the way that almost no one has called stocks up to this record. It is a great lesson on how to gauge the market. The problem is that the pitch is queered, so to speak, by two rather influential groups, who have a rather disproportionate influence on the market. The first is the shorters, and the second is those with a political agenda.

While we love to hear all views on the market, these pair have a massive influence. But all the while pretending they are totally objective with no motivation, whether financial or otherwise. With them, there is never the “on the one hand, on the other hand,” balance needed to form an opinion. It is usually rants based on personal defamation, or distortion/omission of facts.

Normally, at the start of the year, the big investment houses throw their hat into the ring as far as saying the market will rise 5-10%. Then of course, there are the pundits in the mainstream media, normally journalists, who are not necessarily experts on stocks. Even worse, as far as making calls on the market in recent times is that the mainstream media, desperate for regime change, cannot say stocks are heading to record levels, as it would not fit in with the doom and disaster narrative required to remove the Conservatives at the next election.

So where do you get an objective, and hopefully non-clickbait worth analysis of the financial markets these days? The answer is you do not, as almost everyone is peddling an agenda, and those who are not, struggle to get noticed. I hope this state of affairs changes one day, soon.

Pricing Power

As far as an explanation for the record FTSE 100 high, the answer probably lies with what has been portrayed as the biggest enemy of our times: inflation. While it may be the enemy of savers and those on low wages, the strike action we are being treated to currently shows that wages do tend to get ratcheted up in such an environment.

At the same time, corporates providing non-discretionary goods and services will not only enjoy pricing power, but they can also and will engage in profiteering. Profiteering is not something which can be engaged in when were are in a low-inflation scenario.

But even if the siren voices against high prices and the need to raise interest rates are right, the conventional opinion, at the start of 2023 sees the market having both factored in inflation, as well as looking to it falling later in the year.

Small Caps: 1,000 Points Off The Highs

Looking at the small caps, we are some 1,000 points off the record highs of the summer of 2021, below 6,500 on the Small Cap Index. Ideally, the minnows will play catch up, and there have been signs that this process is already underway. Strangely, we are starting to see the luck factor come into play.

This point has been illustrated in a rather spectacular way with the recent rise in Vast Resources (VAST). A company that many had written off, and indeed on occasion been quite disparaging about, has been a five-bagger over the past couple of weeks and its ship came in with long-awaited Zimbabwe news.

Squeeze Higher

Indeed, on the list of risers this week we had Red Rock (RRR), Conroy (CGNR), DeepVerge (DVRG) and Harvest Minerals (HMI), all companies where even if there is no great news around the corner, one would imagine that everyone who had wanted to head for the exit has already done so.

This ideal scenario for fans of the small-cap space is that with the sellers out, only a small amount of buying could squeeze these stocks significantly higher.

Quantum Exponential

Finally, during the week I interviewed rather more companies than usual, which in its way is a good sign. Of interest from a PR perspective was Quantum Exponential (QBIT). There is little doubt that the future is going to be dominated by quantum computers, and that companies investing in this space are likely to benefit from outsized gains.

Does it just depend on whether UK investors can at least diversify some of their interest into the non-resources space?

Reabold Resources

Ironically, for those who do like the resource space, there is the conundrum of Reabold Resources (RBD). A company whose (larger) share of the same West Newton asset is valued less than Union Jack’s (UJO), and where sentiment towards the company is less positive than it was before it managed to sell Corallian to Shell (RDSB), yes, that Shell Oil.

I spoke to RBD and in the interview was left scratching my head as to the current market cap below £20m, especially when we have the second tranche of Shell’s payment for Corallian still to come. This is something which should end up in the pockets of shareholders, either through a buyback or special dividend. With the stock price still bumping along the bottom, such a prospect does not currently appear to be factored in.

Author @ZaksTradersCafe

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The information, investment views and recommendations in this article are provided for general information purposes only. Nothing in this article should be construed as a solicitation to buy or sell any financial product relating to any companies under discussion or to engage in or refrain from doing so or engaging in any other transaction. Any opinions or comments are made to the best of the knowledge and belief of the writer but no responsibility is accepted for actions based on such opinions or comments. Vox Markets may receive payment from companies mentioned for enhanced profiling or publication presence. The writer may or may not hold investments in the companies under discussion.

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