Markets rise and fall on expectations of the future. As the old market adage goes "Buy on the rumor, sell on the news." The idea being that once the news is out there is much less reason to own the stock because the information is now known by all market participants.
While I am not a full efficient market proponent, I do believe that markets are pretty damn efficient, especially in 2016 with the firehose of information literally in the palm of our hands. For us to profit as market participants we must have some, at least slightly, variant view of a particular market, asset class, or security.
This morning I want to highlight an individual stock, NexGen Energy (NXE.TO), and briefly discuss how investor expectations can help us to understand risk/reward.
NexGen is extremely well managed and the company has done an admirable job of exploring for and identifying world class uranium assets in the Athabasca Basin of Canada. NexGen clearly has a motherlode of high grade uranium at its Athabasca Basin projects, however, something interesting has begun to take place since the stock price tripled earlier this year:
NXE has continued to provide investors with regular exploration updates which have all continued to confirm that NXE has world class uranium projects on its hands, however, the stock price has drifted sideways for months and recently the major support at C$2.25 has been repeatedly tested. There is a truth in technical analysis that states "the more times a level is tested the more likely it is to break."
If I owned NXE shares I would be pretty concerned about what could happen in the event that the C$2.25 finally does snap. There is some minor support around C$2.00 and then nothing substantial until the March consolidation range down at C$1.40-C$1.50.
NXE shareholders should be asking why has price action begun to significantly diverge from an apparent steady stream of good news flow? Other questions to ask are "why do I own this stock and at what point will I sell?" i.e. at what point am I right? AND "what might I be missing here?" "what might the bearish view on this investment be?" i.e. how could I be wrong?
I don't have the answers to these questions and I don't have an opinion on NXE as a stock, but I do know what questions I should be asking as an investor. As investors we should always be focused on asking good questions and maintaining objectivity. It's when we lose our objectivity that we lose our money.
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DISCLAIMER: The work included in this article is based on current events, technical charts, and the author’s opinions. The author does not have a position in NXE shares and does not plan to initiate a position (either long or short) in NXE shares in the near future. It may contain errors, and you shouldn’t make any investment decision based solely on what you read here. This publication contains forward-looking statements, including but not limited to comments regarding predictions and projections. Forward-looking statements address future events and conditions and therefore involve inherent risks and uncertainties. Actual results may differ materially from those currently anticipated in such statements. The views expressed in this publication and on the EnergyandGold website do not necessarily reflect the views of Energy and Gold Publishing LTD, publisher ofEnergyandGold.com. This publication is provided for informational and entertainment purposes only and is not a recommendation to buy or sell any security. Always thoroughly do your own due diligence and talk to a licensed investment adviser prior to making any investment decisions. Junior resource companies can easily lose 100% of their value so read company profiles on www.SEDAR.comfor important risk disclosures. It’s your money and your responsibility.
