Obscure Small Cap Runner Pattern
R&D Project!
Today I am writing about what I am calling a runner pattern on micro and small caps.
My feeling is that I still do not know much about it, but I can sense a ton of alpha. So, this is still in the R&D phase.
I traded that pattern from November 2020 – March 2021, unfortunately only with very low capital, but the capital I traded I was able to more than double during that timeframe. And I could have made much more, if I knew I can hold longer then 1 day into the run and when to hold a bit longer.
I am trading that pattern as a side kick with very low capital (less than 10%) only if the environment (as described below) is fine for that kind of trade setup.
Here is the pattern:
There are tons of other oil stocks that had a run the last week and especially yesterday (INDO was the first one!).
Do not chase here, I only would buy this pattern before the run, everything else you need to be a very strong intraday trader which I am not.
So, what do I know about it:
· A very, very strong thematic trend, the thematic trend needs to be known by the broader public very well and needs to get stronger and stronger. Right now, that is inflation and energy.
· On the macro side it seems to appear if you have a longer-term theme. From October 2020 – March 2021 that was reflation (ROC of GDP and Inflation up). Right now, this is inflation (ROC of inflation is up).
My assumption is that pump and dump shops that have millions of e-mail addresses need that knowledge of the public to get a ton of traders interested.
· 3 Months of very strong trend of the underlying industry. The beauty of this pattern is, that into a strong trend certain small caps have a sleeping pattern, e.g., the industry is already extremely strong via higher cap stocks and the micro caps stay neglected for a longer time. (I have read academic papers about this; this pattern is for real!). They then run and repeat the performance of the underlying industry and bigger cap in a matter of hours and days, so it is a bit like a time machine going back.
· The pattern starts with one or two very strong runners that hold their gains. (like INDO).
· The lower the float and the lower the price of the stock the better
· The higher the short interest the better (especially in a reflation regime).
· Assumption: The momentum factor is not overcrowded https://www.msci.com/research-and-insights/insights-gallery/which-factors-may-be-crowded
I did not play this runner phase because I did not know that this runner pattern also works outside of a reflation regime. I know now that a strong inflation theme is good enough so that the pattern emerges.
But my best guess is, that it will not hold as long as in a deep reflation (ROC of GDP and Inflation going up) regime, basically from November 2020 – March 2020.
Once in a while I get lucky, and my system catches on of those runners, like with VTNR at the beginning of May 2021 (out of sample, not in a Backtest, the system bought before the spike and around 500% later ;-)).
This resulted in a spike in the underlying trading system (you guessed it, I was not long that system because it was brand new, and it was in the OOS trading phase, lol!).
I worked on a ton of trading systems that try to capture only this pattern, but they are (for me) untradable because they have regular drawdowns of over 50%).
So, I will try to educate me further and trade it discretionary from time to time and will put more weight on stocks that have a promising runner chart pattern that come from my system book. No need to get greedy here! Step by Step!
A good follow seems to be https://twitter.com/hassytrades on the pattern. Traders like him take the premise to the extreme, that a small account can be a great competitive advantage.
Have a great day!