Small Remains Beautiful

It is perhaps unfortunate that the lifestyle of a technical analyst is not quite as glamorous as some are led to believe, especially as compared to the more obvious fat cat individuals in finance, and of course the BBC, Westminster and the NHS.

But it has to be admitted that even if there is not necessarily glamour 24 hours a day, you do get to meet like-minded people with enthusiasm for what they do. Given that I have retained this enthusiasm for the best part of 30 years with regard to the financial markets, it is always good to see top fund manager Gervais Williams from Miton Group (MGR) in action, talking about the attractions of small companies.

This he did yesterday evening at the Small Cap Club’s event in the City of London, having recently published his book, The Future is Small. In fact, the message is actually rather big and is based on the notion that after years of relative underperformance, small and micro cap stocks will not only have their day, but their era.

This is because in a low growth/deflationary environment, investors and fund managers will be forced to look down the market capitalisation scale in order to get exposure to an asset class which has historically been a massive outperformer. This was the case, for instance, during the darkest days of the 1970s when the UK had to go cap in hand to the IMF, rather like our Greek and Ukrainian friends have had to do more recently.

Perhaps even more fundamental in terms of what Williams said yesterday is that given liquidity restraints at the bottom end of the stock market, when the tide shifts in its favour it may become something of a tsunami. For instance, while we may gripe that currently it is difficult to get out of micro caps when you want to sell, in the future there may simply be no one to buy from as all the supply of stock could be exhausted.

Clearly for fans of this area such as myself, this would be the equivalent of heaven on earth. We are unfortunately not there yet. But I thought it may be worth revisiting the charts of a couple of companies where the Gervais Williams approach has been at work. The first is Finsbury Food (FIF) where it can be seen that the bull run has been alive for quite some time – the best part of 3 years in fact.

The position now is that the shares have bounced off the floor of a rising trend channel from the middle of 2013. This should allow us to conclude that a significant new leg to the upside is on its way over the next 3-6 months. The favoured destination at this point would be the 2 year resistance line projection currently pointing as high as 100p. At the moment only a weekly close back below the 200 day moving average at 61p is regarded as significantly delaying the upside scenario from a technical perspective.

Shares of K3 Business Technology Group (KBT) have been on the front foot ever since the higher June low of 2013 near 100p. Since then they have more than doubled within a rising trend channel. This allows us to project them towards 300p within the charting feature, a target which could be hit over the next 3-6 months. Only sustained price action back below the channel and below 200p really implies that the ongoing ascent will peter out any time soon.