It’s like the Wild West out there! The FTSE 100 declined 2.6 per cent on the day after the election and rebounded 5.2 per cent last Monday. That was the 11th-best daily advance by the Footsie on record.

Much of this volatility was due to Greece. Shares sold off in response to dithering by European leaders. Last Sunday’s announcement of
increased loans and guarantees triggered Monday’s rebound.

So I fear the rally is just a temporary reaction to a very long-term problem. As Carl Weinberg of data analyst High Frequency Economics observes, providing more funds to an already over-borrowed country buys time, but does not solve its underlying problem. More credit merely helps to bury it in a deeper hole.

Most experts believe Greece’s problems can only be resolved if its debt is restructured and its public sector is reduced in size. This greatly worries me. Restructuring means loan providers will eventually take an enormous bath. But recent riots suggest that public sector cuts will be fudged. Either option: ouch.

Greece-induced stock market volatility may taper off in the short-run, but I expect it to return in the months ahead.

Here at home, the Tory – Liberal Democrat negotiations temporarily fell apart on Monday evening. Shares declined the following day but some of this was probably linked to profit-taking after Monday’s big bounce.

I suspect the financial markets do not really care who governs. Market direction will be influenced by the presence of a credible deficit reduction plan. Our politicians will probably be responsible
for big price swings in
the months ahead. Unfortunately, the direction of these swings
is unknown.

Given the potential effects of these domestic and European issues, I anticipate high volatility on the horizon. This year’s summer holiday might not be very restful.

As far as my own portfolio is concerned, I was badly hit by Bioquell’s (BQE) sudden profit warning last Monday morning. The company provides decontamination products and services to hospitals, manufacturing sites and the military.

My initial reaction was to cut my losses and sell. But several factors held me back. One issue is Bioquell’s small size; its total value – or market capitalisation – is just £45m. Companies of this size are often heavily traded by private investors who are prone to panic selling.

Market-makers took full advantage on Monday morning by knocking one-third off the price when the markets opened. My decision to hold off from selling near the opening was a good short-term decision because prices clawed back half of their loss by midday.

Even so, I am still left with a painful loss. I often sell in such situations, but decided to keep this position open for three key reasons.

The price chart shows that the shares have reached a prominent support line. No guarantees, of course, but chart patterns like this often precede a bounce. In addition, the company believes its profit miss is a short-term problem. Revenues and profits will return to plan next year. If they are right, the share price could rise by one-third to one-half.

Then there is the presence of hidden value in Bioquell’s Testing, Regulatory and Compliance (TRaC) division, which few investors appear to be aware of. Rising profits from TRaC are triggered by an ever-growing list of government testing requirements. Several TRaC competitors were snapped up at healthy prices that equate to two to two and a half times revenues. These figures intrigue me. TRaC revenues this year should reach about £12m. My back-of-the-envelope calculation produces a potential value for this division of about £30m.

If I am right, investors currently value the rest of the company at just £15m. Andrew Jones of Investec estimates that the company, ex TRaC, will produce a pre-tax profit of about £4.5m next year. Applying a very conservative price-to-earnings (p/e) ratio of five suggests a potential value of £22.5m for the rest of Bioquell. A more normal p/e ratio of 10 suggests a value of £45m.

I elect to hold on to my shares for these reasons.


Stock market historian David Schwartz is an active short-term trader writing about his own trades and strategies. Send any comments or suggestions to tradersdiary@ft.com

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