Bracing For August

Today is the last weekend before the start of August, a month that is traditionally known as the most treacherous month for the Malaysian stock market. In my monthly-updated Market Pulse column (see link), it is observed that the month of August has seen some of the greater monthly declines historically.

KLCI – what is next?

As mentioned in earlier posting, if it ever breaches the support zone of around 1,728, I personally feel that we may potentially see further downside bias. If it ever breaks the 1,800 resistance point, the index may be on an upside trajectory.

FBMKLCI.png

How should one deal with August?

There are numerous options that may be considered…

  • Focus on swing trading strategies with appropriate reward-to-risk ratio / risk management strategies
  • Bargain hunting for beaten-down value stocks / mid-large cap stocks (for purpose of long term investing)
  • Increase cash position (in money market funds)
  • Maintain status quo

Tracking Volatility

Short term volatility is greatest at turning points and diminishes as a trend becomes established.

George Soros

 

As shown below, the current volatility of FBMKLCI continues to remain low. If the volatility increases, this may indicate that a potential trend reversal is imminent.

hv.jpeg

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.

Volatility & Companies Trading Below Book

Question of the day – what happens when there is a significant drop in share price volatility (over a period of time) of companies that are trading below book (or net asset value, NAV) ?  Let take a brief look at 3 Malaysian-listed companies:

Company 1 – TA Enterprise

This property company has been trading below its book value or NTA. Since mid 2014, there has been a steady decline in its share price with a corresponding drop in Price / NAV and Average True Range (“ATR”) (a measure of volatility). There was a reversal of trend since early 2017 and has since continued with its upward trajectory. What was evident was that both Price / NAV and ATR had dropped to record low before a counter-trend emerges.

TA_may 17.png

Company 2 – MNRB

This reinsurance company’s share price has been on a declining trend since mid 2014, with a corresponding drop in Price / NAV and ATR. Similar to TA Enterprise, what was evident was that both Price / NAV and ATR had dropped to record low before a reversal in the trend emerges in August 2016.

MNRB_may17.png

Company 3 – Pasdec

Similar to both TA Enterprise and MNRB, what was evident was that both Price / NAV and ATR had dropped to record low before a reversal in the trend emerges in April 2016.

Pasdec_may 17.png

What about this company? 

Daiman has recently reached record low Price / NAV and ATR. One should ask when will a ‘new trend’ emerge? Could this company be in the value trap category? Only time will tell.

Daiman_may17

The above analysis is observation of certain selected companies. As the sample size is small, further research is definitely required on whether the combination of low Price / NAV and ATR will have predictive value of companies’ future share price.

DISCLAIMER: THIS IS A PERSONAL BLOG AND SHALL NOT BE RELIED IN WHATSOEVER MANNER BY ANYONE. ALL ARTICLES CONTAINED IN THIS SITE ARE 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.

Volatility & Stocks Movement

Our assumed tenets about volatility and movement of stocks are as follows:

1. Volatility does not predict the direction of stock movement;

2. When volatility increases, we expect condition to be bearish and vice versa; and

3. When 10D moving average volatility crosses above 50D moving average volatility, this signals increase in volatility and thus will result in potential bearishness for the particular stock and vice versa.

Let’s take a look at how volatility is interrelated with the share price movement of Sapurakencana Petroleum (a Malaysian-listed O&G stock, “SKPetro”):

SKP_1_Vols.png

It is observed:

  • In general, when there were significant increases in SKPetro’s volatility (e.g Oct-Nov 14, Aug-Sep 15, Feb-Mar 16), there were declines in the share price of SKPetro.
  • The relationship (i.e when volatility rises, price should decline) appears weak in 2012-2013.
  • When SKPetro was trading sideways (e.g Oct 13- Sep 14), volatility declined

Volatility analysis is further analysed below, with the plotting of difference between 10D moving average volatility and 50D moving average volatility. As per our assumed tenets, when 10D MA breaches 50D MA (in few occasions shown in the graph below), we saw declines in the share price of SKPetro, in line with a more bearish sentiment / growing uncertainty. 

SKP_2_VolsFrom the above analysis, it is observed that we are currently seeing an increasing volatility for SKPetro (spike in volatility in May 2016), potentially signaling a ‘bearish’ outlook for SKPetro in the short term.

Implied Volatility : What The Market Expects

The following is an extract of currently traded structured warrants (with underlying “SKPetro”):

SKPEtro_iV.png

The future volatility of SKPetro is expected to trend higher, as shown in the above table whereby the structured warrants’ implied volatility are relatively higher than the underlying’s current historical volatility of 33.0%.

Concluding Remarks

It is very important to re-emphasize that the increase or decrease in volatility does not predict the direction of the stock movement. Higher volatility means more opportunities for trading.

DISCLAIMER: ALL ARTICLES CONTAINED IN THIS SITE ARE 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. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS. THE AUTHOR MAY HOLD POSITIONS IN THE SECURITIES MENTIONED ABOVE.

Volatility & FBMKLCI (Update)

Historical Volatility: What we know so far

Analysis of historical volatility or statistical volatility shows that in rising prices, volatility tends to be lower as risk or fear subsides. When prices are declining, volatility will tend to increase.

The graph below highlights the relationship between FBMKLCI and its historical volatility (annualised, 30day), 10 day moving average volatility and 50 day moving average volatility.

FBMKLCI_May16_Vols(1).png

As shown above (e.g period : Jan-Feb 2015, Sep-Oct 2015, Feb-Mar 2016), when FBMKLCI declines, the historical volatility increases.Even in the recent selloff in May 2016, we saw a spike in the statistical volatility.

It is important to note that as the 10-day moving average volatility moves above the 50-day moving average, the market conditions are turning bearish. And as the 10-day moving average moves below the 50-day moving average, the market conditions are expected to turn bullish. When the 10-day moving average diverges far apart from the 50-day moving average, the FBMKLCI will experience correction. Currently (in May 2016), we saw the 10D moving average volatility crosses above the 50D moving average volatility, signaling a bearish market condition.

Implied Volatility: What may happen next

Implied volatility is the market expectation of the future volatility. This can be imputed from the traded options. The following table shows the structured call warrants (with the underlying: FBMKLCI) that are currently traded on Bursa and will be expiring from August 2016 onwards:

FBMKLCI_May16_Vols(2).png

It is observed that the average implied volatility from these structured call warrants is 15.8% which is relatively higher than the current historical volatility of 9.3%(as of 27 May 2016). Market expects more volatility in the next few months. Unfortunately, volatility does not predict the direction of the underlying. Based on the implied volatility of the structured warrants, there is 68% chance (i.e based on 1-standard deviation) that FBMKLCI may trade between 1,335.5 and 1,938.9 up to 31 Jan 2017.

 

DISCLAIMER: ALL ARTICLES CONTAINED IN THIS SITE ARE 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. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS. THE AUTHOR MAY HOLD POSITIONS IN THE SECURITIES MENTIONED ABOVE.

Increasing Volatility, Increasing Downside Risk

Since 2015, the 90-day historical volatility has been increasing for both Strait Times Index (STI) and FTSE Bursa Malaysia KL Composite Index (FBMKLCI). Based on past index / volatility trends, increasing volatility generally led to negative movements in the indices

Background of volatility

When the stock market goes up one day, and then goes down for the next five, then up again, and then down again, that’s what you call stock market volatility. Seasoned traders who monitor the markets closely usually buy stocks and index options when the VIX is high. When the VIX is low, it usually indicates that investors believe the market will head higher. This, in turn, can trigger a market selloff, as speculators try to unload their holdings at premium prices.

http://www.commonwealth.com/RepSiteContent/stock_volatility.htm

Historical Volatility – STI

Historical volatility of STI indicates the following:

  • Lower volatility period (e.g 2003 – 2006, end 2009 – 2015 excl. 2011-2012) will lead to positive movements in the STI
  • Upward spikes in volatility usually led to negative movements in the index (e.g 2008 – 2009, 2011-2012)
  • Recent 90-day volatility is increasing and is currently stands at 16.7%, approaching the long term average 90-day volatility of 18.0%. If volatility increases above the long term average, there is a possibility that the decline in STI will continue (potentially at a faster pace)

Slide1

Historical Volatility – FBMKLCI

Historical volatility of FBMKLCI indicates the following:

  • Similar patterns to that of STI
  • Lower volatility period (e.g 2002 – 2006, end 2009 – 2015 excl. 2011-2012) will lead to positive movements in the STI
  • Upward spikes in volatility usually led to negative movements in the index (e.g 2008 – 2009, 2011-2012)
  • Recent 90-day volatility has increased and is currently at 11.48%, approaching the long term average 90-day volatility of 15.17%. Unlike STI, it appears that the recent volatility for FBMKLCI may trend lower & further from the 15.17% mark, signaling the possibility of FBMKLCI rebounding.

Slide2Key Implications

  • Recent developments in global markets will continue to drive up the volatility for both STI and FBMKLCI
  • If compared to STI, FBMKLCI’s volatility appears to be relatively lower than of STI
  • Investment entry should coincide with periods of lower volatility

 

DISCLAIMER: THIS SITE IS 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. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS.