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Screenshot 2022 07 01 at 13.20.44 | Quentinvest
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Spread betting and decision making

July 1, 2022
ZM | Quentinvest

Because I always do it I hadn’t realised one significant point about spread betting. It forces you to take decisions about your investments. In my share account I bought QQQ3 at $220 or thereabouts and I am still holding them at below $70. No way could I do that in a maxed out spread betting account being operated at five times leverage. I would have been forced to sell long ago.

Now look at the chart of Zoom Video above. There were two key sell signals. The first came when the uptrend line was broken after a prolonged rise. Given my new approach to trading I think I would have been out on that one. But if I didn’t the next sell signal was a killer. Now we have a falling Coppock indicator, a broken trend line, a dead cross on the moving averages and a breakdown from a significant pattern with descending peaks. This chart is screaming sell and in a spread betting account you would have to do that; it is like driving a Formula 1 car flat out; there is no margin of error.

But if you hold the shares in a share account there is no such pressure. You can go back to the fundamentals which still looked as exciting as ever in August 2021. The overall market was still climbing towards an eventual November 2021 peak. Interest rates were stuck at super low levels and the company was bursting with bullishness. At that time the company had recently reported its Q1 2022 earnings for the quarter ending 30 April 2021.

I want to start by thanking our customers for their commitment to and trust in Zoom, which drove a strong start to our fiscal year with revenue growing 191pc year over year as well as strong profitability and free cash flow.

Q1 2022, 1 June 2021

Everything in the report was gung-ho about the progress the group was making.

At the start of the calendar year, we announced reaching 1 million seats for Zoom Phone. Well, that momentum continues, and I’m happy to announce we have now surpassed 1.5 million Seats as of the end of April.

Q1 2022, 1 June 2021

There was nothing in the fundamentals to suggest the shares were ready to be sold.

Our Net Dollar Expansion rate (a key measure of progress) for customers with more than 10 employees exceeded 130pc for the 12th consecutive quarter as existing customers acquired more Zoom Meetings, Rooms, Webinars and Phone products. For this customer subset, we expect the Net Dollar Expansion rate to remain above 130pc for the next few quarters.

Q1 2022, 1 June 2021

The business was clearly on fire and yet the shares had already peaked (in October 2020) and were building an important top area. Based on my two out of three ain’t bad strategy they had already signalled selling in December 2020 and in August 2021 came the massive breakdown with all my indicators pointing down. Over the next nine months the shares fell from $400 to a low of $79.

The bottom line is that you cannot trust the fundamentals but you can trust the charts. Of course it is very tempting when you hold a share to go back to those fundamentals for reassurance that you did the right thing to buy the shares and are still doing the right thing in holding them. This is why my new mantra is b****r the fundamentals because they are no help at all in deciding when to buy or when to sell (unless there is an exciting something new going on and even then you need to back the chart).

Something new plus a great chart is a great buying opportunity but something new and a terrible chart means go with the chart. This requires discipline and decisiveness which is why I am hammering this point home again and again. We all need to get it and that includes me. It’s not rocket science it’s common sense but somehow it goes against the grain. We want to buy a share and fall in love with it and hold it through thick and thin but unfortunately it is obvious from the way shares are behaving that that is nowhere near an optimum strategy.

This is especially the case because we have an alternative. It is clear that using my indicators to take buying and selling decisions will have a dramatic effect on performance and, in my case, will enable me to pursue the aggressive leveraged spread betting strategies that appeal to my gambling instincts. I love going out there, placing big bets and winning and it can be done because I have done it time and time again.

What has messed me up has been paying too much attention to those damned fundamentals which are really just a lure leading us into the swamp. My plan which I hoped I can stick to is that I am not going to be lured anymore.

There is nothing to suggest that Zoom Video is not a very exciting 3G company with huge potential in a world adopting advanced technology at an accelerating rate but that only helps us with selection. It tells us nothing about timing. As it happens the chart is looking interesting. It is very possible that we are going to see buy signals in the near future. If we do I will let you know.

That is another part of the disciplined approach. Just as we need to sell on a clear sell signal we need to buy on a clear buy signal. That is the whole point: these signals work. Maybe not all the time but often enough that it makes sense to use them.

Strategy

Just look at that Zoom chart and ask yourself if using my indicators would not improve your investment performance. Note that until recently I was not able to offer this kind of service because in a world of print it would have been far too costly. That has changed completely. Since the beginning of June I have sent out 26 alerts, which has been another massive influence changing my approach by making it practical.

By the way I didn’t pick the Zoom chart because it would illustrate my approach. It was just the first one I though of and it showed my indicators working very well. Yes it helps to have 20:20 hindsight but even with that proviso these shares clearly signalled selling at much higher levels and back in February 2020 they gave an equally unequivocal buy signal.

Note that I have temporarily suspended publication of Great Stocks and Great Charts (now known as Stock Market Selections and Stock Chart Analysis) because they are all about making share recommendations and that is not really happening at the moment so I don’t want to be forced to waffle meaninglessly about what is not happening. Much better to concentrate on using my Investment Alerts to get my subscribers fully up to speed on my new approach to investing.

This frequency of alerting may even increase in future as we move into a new bull market and I have exciting buy signals to report. Meanwhile I want you to be clear about my new strategy. Fundamentals are primarily for share selection, to establish that shares are 3G (great growth, great story, great chart). Once we have done that it is all about using my indicators to time buying and selling.

This goes against the grain for most of us so we need to learn to be disciplined in our approach. Imagine that you are living in Putin’s Russia and if you don’t act on clear signals you won’t just lose money (or fail to make it); you will be taken out and shot. Apparently this helps greatly to concentrate the mind.

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