Bring out your dead

I thought posters will relate to this! I found it in Markets and Money 13 June. i wonder if he is currently buying. This might be optionstradermgr who posted on another thread with a brilliant eminem quote. I bought my last tranch at 66 and now breaking even. $ just got to start coming in and away we go!

Bring Out Your Dead

By Murray Dawes in Albert Park

It’s that time of year again. Time to face up to the fact the little mining stock you thought was going to the moon is actually a dog with fleas. Dump it before the end of the tax year to take the tax write off and move on. You can always buy it back if you are determined to lose more money on it at a later stage.

The flipside of tax loss selling season is that a few bargains can be had for the astute.

Companies with good long-term prospects that have had a poor year can end up being given away once the tax loss selling reaches a crescendo. It can be a good time to have some powder dry waiting on the sidelines to snap a few shares up if the selling goes too far.

Just to give you an example, one company I have my eye on as we head into the end of the financial year is Structural Monitoring Systems [ASX:SMN].

The chart looks very sick in the short term, but when you look at the very long term, the price is falling back towards what should be strong support.

After a huge rally from 2014–17 on the back of the very serious prospects for its technology that monitors structures for cracks, it has gone into a long-term downtrend as a result of delays. There are exciting things happening and the company is getting closer to breakeven, but one look at the chart and it is clear there are a lot of frustrated underwater investors in the stock.

My guess is that tax loss selling has already begun and a fall below 70 cents could see it accelerate as we head towards the end of June. The current price is 72.5 cents.

You can see the green box that I have labelled as the ‘buy zone’. It is simply the 75–87.5% retracement of the prior rally from 2014–17. That is the zone where I see reversals most often after a serious shake out. It is the spot where investors in the stock are either out of the money or near breakeven. If you have ever done any trading or investing, I am sure you know the sinking feeling of watching a stock that you were well in the money on racing back towards your entry point.

For example, if you had bought SMN in 2015 at 60 cents and then watched it rally to $3.00 over the next two years and then back to 70 cents, how would you be feeling right now? You’d probably be kicking yourself for not taking profit when it was at $3.00 and you would be feeling nervous that your position was about to go out of the money after spending years looking fantastic.

The temptation to sell in disgust would be extreme.

The feeling would be worse if you had bought the stock above $2.00 and each day you look at the stock price it moves a little lower. I’d imagine you would be getting pretty close to your pain threshold.

Everything I am describing is the main reason why I believe large waves in a trend so often see a substantial correction before carrying on. When you see 75–87.5% of the previous wave corrected nearly everyone who bought during the up-wave would be sorely tempted to dump the stock. Weak hands would be shaken out.

That’s the point we are at right now with SMN. Add in some tax loss selling and you can see why I wouldn’t be surprised to see the stock trading around 50–60 cents over the next few weeks.

But I will be a keen buyer if it does get down there. Especially if we see a weekly or monthly buy pivot from the buy zone. The buy pivot is necessary to prove that there has been a shift in momentum in the short term. I am tempted to catch the falling knife with this stock because any positive announcement from here could see the stock change course very rapidly, but I have found over many years that the fear of missing out usually leads to rushed trades and they don’t often end well.

Structural Monitoring Systems has a very interesting story to tell. They have developed a technology that can monitor for cracks remotely. I am sure you can imagine how useful it would be for an airline to be able to monitor the structure of their airplanes at key points where fractures often occur without needing to pull things apart at regular intervals to do inspections.

I am also sure you can imagine the immense regulatory hurdles that the technology would need to navigate before being accepted as a valid form of inspection for aircrafts. They are nearing the end of that journey and have some interesting projects in the wings.

The barriers to entry for competitors are enormous. If their technology becomes the standard world-wide then the sky’s the limit. No wonder they rallied from nothing to $3.00 a few years ago.

One of the major reasons they fell from grace though, was that insiders were selling the stock above $2.00 while they were telling the market they wouldn’t sell. That is a big cross against management, and I am pretty sure a lot of larger investors dumped the stock as a result of the loss of trust.

When corporate governance is a major issue and trust has been lost it can be a long road back. Especially for larger investors and money managers. But if that issue has been taken care of and the technology is finally commercialised with the potential of moving into other sectors, I could see the coming tax loss selling as a great opportunity to get on board.

Murray Dawes,
Editor, Alpha Wave Trader