Nothing has taken my interest on a technical momentum basis this week. The market can’t decide what to do next, and the bull run that started in the new year has stalled.

Even though things do not seem as gloomy as in 2022 when inflation ravaged the financial system due to excessive stimulus and hundreds of ships queuing for port places, I do think that the market, especially in the US, had been recently overly optimistic that everything was going back to normal with a 2% inflation level, zero interest rates and all-time highs in the stock market by the end of the year, maybe an exaggeration there, but the sentiment felt that way. Perhaps the Federal Reserve felt that too. The FED now does not like the thought of everyone feeling prosperous and happy, as this has the potential to cause another spike in inflation. So it is inevitable that they will stop any market from getting ahead of itself.

The latest Personal Consumption Expenditures (CPE) and Consumer Price Index (CPI) came in hotter recently, another sign the FED will step in. The market is now scratching its head, wondering why Tesla stock is no longer shooting to the moon. With many investors and traders running for cover, I sit back and make another cup of tea at times like this.

Patience is a virtue, and this statement could not be more accurate regarding trading. After the market had such a bullish rise recently, this price action looks like a stage 3 market cycle (see below). A stage 3 market cycle is easier identified after the fact, but one must learn how to act when in the eye of the storm. I am a trend trader, mainly looking at the consumer discretionary and technology sectors; even though these two sectors are still trading above their 50-day Moving Averages, the momentum is dying off, all other sectors are clearly under their 50-day MA, and I predict it will not be long until my chosen sectors trade under my chosen momentum indicator. Or will they? We don’t know, and that’s the point, so wait, watch, and learn.

The market didn’t like that the Federal Reserve issued a statement this week saying they will do all they can to fight inflation with potentially higher interest rates for longer. They said the same thing for months, but due to the average investor having a memory span of less than a goldfish and being sucked into a nonsense bull market or bear market correction, where calculations are made on how much money one will make when all-time highs return. The unwelcome comments created a slight sell-off. 

The Bank of England is taking a more relaxed approach to inflation, with Andrew Baily hinting at a pausing of interest rate hikes and confident that inflation will be down considerably by the end of the year. I always view the UK as the 51st state, and what happens over the pond will happen here too. It will be interesting to watch how all this pans out.

I watch the macroeconomic situation and take all predictions from ‘professional analysts’ with a pinch of salt. I mostly watch for entertainment value. As a momentum trader, I wait for momentum to return to my chosen area and do not fight the chart.

I will also participate in Position Trades. These trades will be in good, well-run, profitable, time-served companies that have sold off due to market cycles. I am confident that one day a new bull run will roar, and I want to be exposed to companies that have often proved themselves in market downturns.

Somero Enterprises.

Somero is a company that fits into this category. It has a market cap of £210 million and trades in the Alternative Investment Market (AIM) on the London Stock exchange.

It makes Laser levelling machines for levelling concrete (as seen below) in large areas such as warehouses. It mainly operates in the USA but has some growing revenue from Europe and Asia.

The company reported earnings this week, which showed a cooling off from 2021 levels, these levels were high from the pent-up demand from 2020-2021 lockdowns.

Revenue was still up slightly, but EPS was down due to rising costs, mainly from higher labour costs and supply chain pressures experienced during 2022. These are now subsiding, so this should be reflected in FY23. Operating margins are still 32.3%, which is great to see when heading for a downturn.

The company has 33m dollars in cash and no debt. It provides a dividend yield of 7%, but dividends are down slightly from the previous year. 

I suspect the building sector will cool off this year and maybe next, but will it return one day? Of course, it will. In my simplistic view, builders will need to level floors when this time comes. There is competition out there for the machines Somero produces. Still, with the bounce back after a recession strong in areas such as construction, the highly regarded Somero machines will be in demand and with the strength of the balance sheet, this could potentially enable Somero to take more market share. 

Again patience comes into my plan when looking at this company. The Price to Earnings ratio is already cheap but could push lower with market sentiment. There is a potential for some profit warnings in the next year if the downturn is more substantial than expected. Those with a longer-term view should see passed these short-term headwinds and see a company that can win the battle against a downturn in its sector. 

Not surprisingly, EPS is due to reduce further to $0.53 for FY23, with analysts also expecting a deeper recession.

$0.53 to GBP is 45p. 

The stock usually trades on a PE Ratio of c.11x. 

With the stock currently at 371p, this gives us a PE of 8.2x

So already, I can see the upside from here.

The stock trades under its 50 Weekly Moving Average, heading down to a 200 WMA. With market sentiment around the construction sector, the stock could fall below the 200 weekly WMA.

I will monitor market data and watch for a bottom in price action and recovery started in the construction industry and Somero. I plan to take a position and hold for the next bull run and hold slightly longer than my average momentum trade.

Other things of interest that have caught my eye this week:

 WANdisco

I kept seeing this company on my news feed with highly regarded knowledgeable investors talking very positively about the company. It had massive plans, one of which was to list on the US Stock Market. I saw the hefty valuation and thought I'd missed out; it may have gone on my momentum watchlist later. On Thursday, this all came crashing down when the company announced fraud. The company blames a rogue salesperson for making up sales; I think the scam goes a little deeper than that. It is not the first time a company has duped its investors, and it will not be the last. You can't blame the commentators on this stock because the fraud is buried deep in the financials that a retailer trader can't see. The company has some big investors and institutions involved, all duped. These institutions pretend they know what they are doing, but after hundreds of hours of research, they cannot see the scam, so what chance have we got? That's why I trade the way I do. Always ensure you have at most 10% (that's my risk allowance, yours may be lower) in any asset.  

Going Forward

As we advance into next week, I may look at short positions in the US markets on a daily to 4 hourly timeframes. These positions will have a tight stop loss and clearly defined take-profit areas. The companies identified so far have had a great run from the new year and formed a Stage 3 top. (As seen below). Companies such as Tesla, in my opinion, did not deserve the incredible run they had recently. Many traders pretending to be investors still ignore the macroeconomic situation and fundamentals of the business.

In my UK portfolio, the companies I currently hold all still trade above their 50-day MA, and I will look to cut these positions if the trend clearly reverses.