It Is All About The Edge

Little Rocketman has certainly created much anxiety in the financial markets. Further, the planned reversal of QE is envisaged to have greater impacts on emerging markets. Foreign funds have continued (?) to sell their positions on the Malaysia’s stock exchange. The FBMKLCI has suffered a 6-day consecutive decline. Are we in an oversold position?

IntroKLCI.png

If Rocketman decides to launch a missile, there could be more downside risks. Assuming that I would like to take a punt by taking a long position (i.e the KLCI is currently oversold), I may want to consider the following structured warrant:

Warrant Terms.png

Finding My Edge For A Long Position

To re-iterate again and again, I do not have the crystal ball to foresee what is going to happen in the next few days. More importantly, one should understand the trading edge before executing a position. So, what is the edge for this bet?

1.  Support, Support, Support

If you see the following hourly chart, there could be some possible zonal support around 1,761 ( a clear rebound). The next point of defense will be at 1,756.

FBMKLCI.png

2.  Implied Volatility < Actual Volatility

At current warrant price of RM0.05, the implied volatility of the underlying could be in the low range of 3% – 4%. Relatively lower than the actual volatility.

Implied Vol.png

Actual volatility has spiked up to 9.40% , as of today:

KLCI_VOLS.png

3. Seasonality may matter

With FBMKLCI-C3F, I have more than 180 days prior to the expiry of the warrant in March 2018. Based on the following seasonality table:

  • Possible profit taking opportunity in the months of October, December and March which appear to be historically positive (m-o-m basis)
  • Be cautious (with a possibility of taking stop-loss) in historically weak months of November and January

October Seasonality.png

DISCLAIMER: THIS IS A PERSONAL BLOG AND SHALL NOT BE RELIED IN WHATSOEVER MANNER BY ANYONE. ALL ARTICLES CONTAINED IN THIS SITE ARE STRICTLY FOR INFORMATION AND ILLUSTRATIVE PURPOSES ONLY AND DOES NOT PURPORT TO SHOW ACTUAL RESULTS. IT IS NOT, AND SHOULD NOT BE REGARDED AS INVESTMENT ADVICE OR AS A RECOMMENDATION REGARDING ANY PARTICULAR SECURITY OR COURSE OF ACTION. SOURCES USED IN THIS SITE HAVE NOT BEEN INDEPENDENTLY VERIFIED FOR ACCURACY, COMPLETENESS AND TIMELINESS. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS. THE AUTHOR MAY HOLD POSITIONS IN THE SECURITIES MENTIONED IN THE ARTICLES.

Statistics & CPO

I am NOT a Crude Palm Oil (CPO) expert. I do not profess to be one too. I am more interested in the statistical element of CPO prices. 

Commodities like CPO are dependent on cycles (seasonal factors). In fact, there are weather considerations that will impact on CPO prices. The following graph shows the historical CPO price since November 2007, with a historical median CPO price of RM2,585.

CPO_1.png

As shown below, it is observed that there are some “seasonal weakness” in the CPO prices (mainly in Q2-Q3), middle of the year):Presentation1.png

The following table shows that on average (since Nov 2007), there is a probability that CPO price will tend to fall below the median price of RM2,585 in the months of Aug, Sep, Oct and Nov:

CPO_2

The following graph shows the estimated CPO price (by month) by adding the average differential (between CPO Price and CPO median) with historical median CPO price of RM2,585. Strictly For Educational and Illustrative Purposes Only

CPO_3

One may argue that trading in commodity or commodity-related companies should be based on seasonal factors and cycles. If that argument holds and assuming that the above high-level statistical analysis works out as planned, I may personally consider the months of October-November as a possible (not a certainty) entry point for trading CPO or palm oil-related stocks. It is important to note that there are NUMEROUS factors that impact on CPO prices. Statistics may not work at times.

DISCLAIMER: THIS IS A PERSONAL BLOG AND SHALL NOT BE RELIED IN WHATSOEVER MANNER BY ANYONE. ALL ARTICLES CONTAINED IN THIS SITE ARE STRICTLY FOR INFORMATION AND ILLUSTRATIVE PURPOSES ONLY AND DOES NOT PURPORT TO SHOW ACTUAL RESULTS. IT IS NOT, AND SHOULD NOT BE REGARDED AS INVESTMENT ADVICE OR AS A RECOMMENDATION REGARDING ANY PARTICULAR SECURITY OR COURSE OF ACTION. SOURCES USED IN THIS SITE HAVE NOT BEEN INDEPENDENTLY VERIFIED FOR ACCURACY, COMPLETENESS AND TIMELINESS. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS. THE AUTHOR MAY HOLD POSITIONS IN THE SECURITIES MENTIONED IN THE ARTICLES.

Random Blathers (14 Sep 2017)

Kumpulan FIMA: Possible failure test. Share price has not touched $1.68 since Q4 2011 (may appear to be a strong resistance point). Management’s assessment of prospects – appears to be challenging for the rest of the financial year. Nevertheless, the Company is currently in a net cash position.

Based on the following simulation parameters:

  • Target price ($1.90), Stop loss ($1.60), Entry price ($1.71)
  • Risk-to-reward ratio = 1.73x
  • Return (%) =  11.1%

FIMA_14092017_1.png

FIMA_14092017_2.png

Company Prospects

FIMA_14092017_4.png

Relatively healthy balance sheet

FIMA_14092017_3.png

DISCLAIMER: THIS IS A PERSONAL BLOG AND SHALL NOT BE RELIED IN WHATSOEVER MANNER BY ANYONE. ALL ARTICLES CONTAINED IN THIS SITE ARE STRICTLY FOR INFORMATION AND ILLUSTRATIVE PURPOSES ONLY AND DOES NOT PURPORT TO SHOW ACTUAL RESULTS. IT IS NOT, AND SHOULD NOT BE REGARDED AS INVESTMENT ADVICE OR AS A RECOMMENDATION REGARDING ANY PARTICULAR SECURITY OR COURSE OF ACTION. SOURCES USED IN THIS SITE HAVE NOT BEEN INDEPENDENTLY VERIFIED FOR ACCURACY, COMPLETENESS AND TIMELINESS. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS. THE AUTHOR MAY HOLD POSITIONS IN THE SECURITIES MENTIONED IN THE ARTICLES.

Malaysian Banking Sector (Sep 17)

One of the key finance principles: “A company that earns a return on equity in excess of its cost of equity capital has added value.” 

Read more: Cost Of Equity http://www.investopedia.com/walkthrough/corporate-finance/5/cost-capital/cost-equity.aspx#ixzz4sWnwaXVp

Thank my friend, James again for his effort in extracting the following info – a quick snapshot of the Malaysian banking sector:

Banks2.png

The following chart shows the significant relationship between price-to-book of banks and the difference between its return on equity and cost of equity:

Banks1.png

In a nutshell, if ROE is higher than COE, it is generally expected that the bank will trade at a higher price to book.

DISCLAIMER: THIS IS A PERSONAL BLOG AND SHALL NOT BE RELIED IN WHATSOEVER MANNER BY ANYONE. ALL ARTICLES CONTAINED IN THIS SITE ARE STRICTLY FOR INFORMATION AND ILLUSTRATIVE PURPOSES ONLY AND DOES NOT PURPORT TO SHOW ACTUAL RESULTS. IT IS NOT, AND SHOULD NOT BE REGARDED AS INVESTMENT ADVICE OR AS A RECOMMENDATION REGARDING ANY PARTICULAR SECURITY OR COURSE OF ACTION. SOURCES USED IN THIS SITE HAVE NOT BEEN INDEPENDENTLY VERIFIED FOR ACCURACY, COMPLETENESS AND TIMELINESS. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS. THE AUTHOR MAY HOLD POSITIONS IN THE SECURITIES MENTIONED IN THE ARTICLES.

Random Blathers (11 Sep 2017)

Latitud Tree Holdings: Possible failure test. Opportunity for swing trading.

Latitud_RB_11092017.png

DISCLAIMER: THIS IS A PERSONAL BLOG AND SHALL NOT BE RELIED IN WHATSOEVER MANNER BY ANYONE. ALL ARTICLES CONTAINED IN THIS SITE ARE STRICTLY FOR INFORMATION AND ILLUSTRATIVE PURPOSES ONLY AND DOES NOT PURPORT TO SHOW ACTUAL RESULTS. IT IS NOT, AND SHOULD NOT BE REGARDED AS INVESTMENT ADVICE OR AS A RECOMMENDATION REGARDING ANY PARTICULAR SECURITY OR COURSE OF ACTION. SOURCES USED IN THIS SITE HAVE NOT BEEN INDEPENDENTLY VERIFIED FOR ACCURACY, COMPLETENESS AND TIMELINESS. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS. THE AUTHOR MAY HOLD POSITIONS IN THE SECURITIES MENTIONED IN THE ARTICLES.

Random Blathers (10 Sep 17)

Homeritz – formation of a triangle. Would there be a breakout soon?

Homeritz 10092017.png

WTK – heading towards 2008-2009 low level (i.e RM0.70).  Undemanding current price-to-book ratio.

WTK10092017.png

Teo Seng: Recent spike in volume. Resistance expected at RM0.98.

TeoSeng 10092017

 

DISCLAIMER: THIS IS A PERSONAL BLOG AND SHALL NOT BE RELIED IN WHATSOEVER MANNER BY ANYONE. ALL ARTICLES CONTAINED IN THIS SITE ARE STRICTLY FOR INFORMATION AND ILLUSTRATIVE PURPOSES ONLY AND DOES NOT PURPORT TO SHOW ACTUAL RESULTS. IT IS NOT, AND SHOULD NOT BE REGARDED AS INVESTMENT ADVICE OR AS A RECOMMENDATION REGARDING ANY PARTICULAR SECURITY OR COURSE OF ACTION. SOURCES USED IN THIS SITE HAVE NOT BEEN INDEPENDENTLY VERIFIED FOR ACCURACY, COMPLETENESS AND TIMELINESS. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS. THE AUTHOR MAY HOLD POSITIONS IN THE SECURITIES MENTIONED IN THE ARTICLES.

A Very Long Rectangle

The rectangle chart pattern goes by many names. A rectangle pattern is simply a trendless price channel created when price action reaches two identical, or nearly identical, highs and lows. This is also called a congestion zone, consolidation area or trading range. Ideally, the highs and lows alternate, though this is not necessary. The matching highs form a resistance level and the lows a support level. Price action oscillates between these limits until it finally breaks out either high or low.

Read more: How are rectangle patterns interpreted by analysts and traders?

rectangle1.gif

Duration: Rectangles can extend for a few weeks or many months. If the pattern is less than 3 weeks, it is usually considered a flag, also a continuation pattern. Ideally, rectangles will develop over a 3-month period. Generally, the longer the pattern, the more significant the breakout. A 3-month pattern might be expected to fulfill its breakout projection. However, a 6-month pattern might be expected to exceed its breakout target. Reference

In a nutshell, it is rather unusual for a rectangle pattern to last more than six (6) months. This happens to be the case for Kian Joo Can Factory Bhd, whereby its rectangle pattern has lasted since mid 2013 till present. One should wonder what is going on with this company?

KJCB_Sep 17.png

DISCLAIMER: THIS IS A PERSONAL BLOG AND SHALL NOT BE RELIED IN WHATSOEVER MANNER BY ANYONE. ALL ARTICLES CONTAINED IN THIS SITE ARE STRICTLY FOR INFORMATION AND ILLUSTRATIVE PURPOSES ONLY AND DOES NOT PURPORT TO SHOW ACTUAL RESULTS. IT IS NOT, AND SHOULD NOT BE REGARDED AS INVESTMENT ADVICE OR AS A RECOMMENDATION REGARDING ANY PARTICULAR SECURITY OR COURSE OF ACTION. SOURCES USED IN THIS SITE HAVE NOT BEEN INDEPENDENTLY VERIFIED FOR ACCURACY, COMPLETENESS AND TIMELINESS. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS. THE AUTHOR MAY HOLD POSITIONS IN THE SECURITIES MENTIONED IN THE ARTICLES.