Thursday, 1 November 2018

MARKET SIGNAL : HOW WE ANTICIPATED SEACERA'S 50% PRICE INCREASE IN 4 DAYS





We're going to share with you one of our market signals for buying into a stock that has the potential for double-digit percentage gains. Within about... four days, as we will demonstrate. There's a catch though; the market signal is just a fraction of what makes a profitable trade. Other things you'll have to learn on your own; trading execution, gumption (the courage to deal with extreme price movements), how to manage your bladder, et cetera.


To us, the market signal (or a trigger to start trading a stock) was blindingly obvious. But the market may not be operating on logic sometimes. Investors may be late in processing important market moving information. Or market conditions may be so bad that nobody cares how good the news flow is. The lesson is this : signals are just that. They may never be 100% accurate, but they can lead to excellent returns on investment, if wisely applied.


The market signal is this :


When a stock falls due to extreme selling pressure by major shareholders, it's time to buy into it. The selldown is temporary, and a price recovery is almost assured within a limited timespan. The buying opportunity is especially attractive if the stock fell steeply and hit new lows.


That's it; we just laid it out on a platter for you. All the best and go make your millions.


Do you trust us or this guy? Link to buy his book.



OK, there's actually a lot more to it than that. To elaborate, we will use as an example a recent trade that capitalised on this angle. For the record, we have established a fairly successful track record on trading this very opportunity, just to prove that this was not a one-time lucky break.


Which companies, how successful they are, or which sectors do not matter at all with this market signal. Profits that can be derived are arguably lower-risk, and possibly has a higher profit potential, than the bad news-driven volatility trades that we occasionally throw ourselves into.



THE BLINDINGLY OBVIOUS PART 


If there's one concept that forms the bedrock of Pelham Blue Fund's strategies, it is the notion of artificial mispricing. Over the years, we have repeatedly committed large sums to trading this theme in our investment activities. We have thrived from the really successful trades, and suffered from losses that were necessary for us to constantly refine our understanding of it.


To simplify, we'll divide artificial mispricing into two columns. The focus for this post is on the second type.



To identify the blindingly obvious trigger to trade the stock, we will walk you through our recent trade in SEACERA from the very beginning with limited information, to the very end when we were managing our profitable exit points.


PHASE 1 : IDENTIFICATION

As a trader, you must always have an eye for weird or interesting movements in the stock market. Some people binge watch Netflix; we watch the movement in the stock markets and chill.



On 26 October, 2018 SEACERA caught our eye with its monumental price decline and heavy trading volume. The stock fell from 24 sen to 18 sen within hours, or a 25% loss. And this was the day after it had already fallen by 20%!

 Notice the timestamp.


We know (as should you) that such a thing almost always happens in reaction to really, really bad news. But there was nothing to speak of in SEACERA. There was no major scandal. It still has tangible assets. There was nobody being accused of fraud or 1MDB type things. It was loss making and has a heavy short term debt load, but those would not necessarily explain the big move downwards.


At this time, we were left with uneducated guesses. We considered two possibilities:


1) Some loss of major contracts, given the company's closeness to the previous government and government-related contracts.

2) Share sales by major stockholders for one reason or another.


We have experience in trading stocks which possessed the characteristics of either (1) or (2). On the morning of 26 October, we have no inkling on which is which, and there was zero news report or speculation on the company itself.


So to start with, we decided to trade the stock based on pure technicals. The stock had fallen 48% in two days. It easily broke through the 20 sen mark; typically a support point with normally heavy buying interest, but the selling pressure drove the stock further downwards.


We actually built up a position at around the 17 to 18.5 sen mark, with a view towards short term profit taking when the stock recovers. We believe that a stock that falls steeply (by 48%) has the potential of at least making back 10% of the loss; it's similar to our '5% down 1.5% up' rule. The risk profile of such trade is moderate, with what we assumed to be limited downside.


Yet our position moved south quickly, causing us to be somewhat concerned. By this point, perhaps Netflix and chill was the better option. We made the sensible decision to cut our losses and exit the trade as SEACERA closed at its lowest point that day (15.5 sen). We also knew that this outcome would not deter us from re-entering at some point, perhaps when there is more clarity in this situation.


We couldn't bear assuming the position and the risk over the weekend; if some really negative announcement comes out, none of our rules or trading signals matter. It would mean that the extreme selling was justified, and as private information becomes public, another avalanche of selling would have commenced. We stood to lose our capital, our shirts, and the chance to start life anew on the curbsides of downtown Kuala Lumpur.


Daily price chart in SEACERA, 26 October 2018. That's a new NINE-year low. 


But this did not happen. So the following Monday, our diligent and always curious stock exchange operator decided to ask the company outright, "what the hell is going on?". We did not anticipate the query; we have seen many stocks fall steeply without inviting as much as a flying kiss from Bursa Malaysia. 


We are fallible and not very thorough sometimes, but earlier that morning we had a cursory examination of the Bursa Malaysia filings by SEACERA. It appeared that their major shareholders have been selling shares actively since the beginning of the month, not just in recent days. We thought, "Hmm... maybe that's the reason?" (Editor's Note : If we were smarter and more diligent, we would have checked this last week).


A disclaimer : We neither know or care about the reasons behind the selling, only that it was happening. Major shareholders sell their shares for many reasons; cashing out, margin calls, etc. What we care about is whether this would fully explain the stock price's steep. If it does.... we smell opportunity (Editor's Note : In general, it is very unlikely that major shareholders would ever sell stock ahead of bad news, given our strict securities laws on insider trading. Nobody really wants to go to jail).


THE TRIGGER 

By this point, when the query was made - lunchtime, 29 October - we had an idea of where this is going. We only had to anticipate two crucial things that will determine whether we should re-enter this trade:


1) SEACERA's reply to Bursa Malaysia (which typically has to be made within the same day the regulator's query is made).

2) How the stock reacts to the reply.


Of course, we had no idea of knowing when the reply would be made. Most of the time it would be made after market hours. But SEACERA decided to have its stock suspended from trading from 3:03PM to 4:03PM on that day. It was going to reply during market hours. (Editor's Note : an easy explanation is that when a company's stock declines rapidly and receives a regulator's query, it is incentivised to reply as soon as possible, in the hopes of halting the decline and provide clarity to concerned investors)


The reply was sort of what we expected and was very revealing. This is the trigger for us to determine our next move.


This was an admission, and confirmation, of that we seek the most: the stock is merely down due to selling activity. Artificial mispricing confirmed.


We then retraced the steps taken by the stock earlier that day. From a close of 15.5 sen last Friday, it actually opened strongly at 17 sen and never really looked back. During the morning trading session on Monday, it hit an intraday high of 19.5 sen before retreating to close at 17.5 sen at 12:30PM. Opportunity smelled.


We formulated a basic plan to re-enter the stock. We would prepare for the resumption of trading in SEACERA by 4:03PM. We wanted to observe the price activity of the stock in reaction to this disclosure. We suspected that this will positively propel the stock upwards, but we needed that confirmation. So, first things first: we will see how the stock behaves during the first 15 minutes of trading after it resumed.

5-minute chart in SEACERA, 12:25PM to 4:50PM, 29 October 2018.

Turns out we didn't have to wait 15 minutes. Notice that long green candle right after the stock resumed trading? That was enough for us to go in decisively. We bought 200,000 shares at the 18.5 sen and 19 sen mark. By doing this, our position is hedged by a 'profit buffer' once it reaches 20 sen, again supposedly the support point. That one sen-per share profit is a crucial element in determining our longevity in this trade.




At the same time, we strongly suspected that the stock would go much further. The realisation that the stock is artificially mispriced merely allowed us to go into the stock sooner. The market may be slower in realising this, but once it does, there will be strong buying and sustained support in SEACERA, assuring us of profits. (Editor's Note : No prizes for guessing whether this outcome turned out exactly as we anticipated or not)


... this outcome turned out exactly as we anticipated.


BUILDING UP THE POSITION + WEATHERING VOLATILITY

To stay invested in a momentum stock - especially one that moves fast with extra volatility - you have to be able to handle the fluctuations.


Our simple philosophy is : once a market trigger is identified, it's  OK to stay invested in the stock. (Upward) momentum is assured as long as buying interest (high volume) is sustained.


On 30 October, SEACERA, which closed at 20.5 sen the day before, dipped to an intraday low of 18 sen before quickly recovering. Such deviations are normal for momentum stocks. The recovery itself is an additional market signal; the market is buying, and buying big.


The next signal to confirm our anticipations : the stock staged a late rally to close at its intraday high of 21 sen. We had earlier purchased an additional 50,000 shares amid these fluctuations.

Since we tweeted this, the stock has gained.... 47%.


Over the next two days, the stock continued to rise. On 1 November, we conservatively sold our positions at 24 and 24.5 sen for a 20% return on investment - solid work for four days, if you can find them (Editor's Note : Yes, we know it went all the way to 28 sen. We got our profit targets met; we never try to guess the peaks).


Yup.


This trade turned out to be a best-case scenario trade for us; a strong rally during a contra (T+4) period where we did not have to pick these shares up, as it turned out. This following chart pattern demonstrates what we mean.

 Perfect momentum. As of 12:30PM, 1 November 2018.


We have to point out that the stock was on everybody's radar; we sure many profited from this trade over the past four days (it was the top traded stock on the exchange pretty much every day of this week), with little else but intuition and an appetite for a good bet.


But we do think it's better to have a plan. Without a step-by-step process to capitalise on a market signal, we would not have had the opportunity to buy into the stock at a good price. Without the conviction that the signals are real, we would not have been able to accumulate such a large block of shares. And without understanding momentum and volatility, we would not have been able to hold on to the position.


By mastering the three main building blocks of trading - identification, execution, and trade management - it is much easier to replicate the same strategy for future trades. These are the kind of trades we live for, and they're worth the trouble.


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