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Monday, 8 April 2019

TRADE OF THE WEEK #9 : DAYANG ENTERPRISE HOLDINGS BHD


This trade is not about following the herd. But the company was intensely followed by the herd recently - we have made our feelings known about this.

These profits are modest compared to the real cavalier speculators, but bear with us as this approach actually required some strategic thinking. It's something you can use the next time you encounter a similar situation.

You probably know the situation with DAYANG. Great recent profits, massive earnings per share growth, recovery story etc etc. It was evidently a leading oil and gas proxy in recent months, with the stock jumping from 80 sen to RM1.70. Had you blindly followed the advice of other bloggers, you most likely have made a lot more money than us.

But if you had come in late, you'd be left holding the bag. That's the inherent danger of trying to ride the speculative wave. Our trading strategy employed none of that. Instead, we simply utilised market timing after identifying a situation that maximised our chances of profits. 

That situation is called artificial mispricing. It can happen as a result of a suddenly volatile market or a suddenly volatile stock. To simplify, the stars aligned in such a way that we know DAYANG can be traded with minimum downside and great profit potential.

The best part? We got in an out in about three hours' time for a four-figure profit from this modest trade.


THE TRADE

On Monday, 25 March, the markets were roiled by volatility as concerns over a US recession reemerged. Personally we have always felt that the US Fed's decision to hold off rate hikes has been priced in since October last year. The recent, actual confirmation by the Fed wasn't taken positively by the market - on the contrary, it actually fell. Hard. (Editor's Note : As of 5 April, markets have strengthened to new heights thanks to that other old news - resolution of the trade war)

Some background: the previous Friday, 22 March, the S&P500 index fell 1.9% - a humongous one-day decline. This obviously would have a knock-on effect on Asian markets the following Monday (25th). Indeed, Japan's Nikkei opened nearly 3% lower, with similar reaction in Hong Kong and China's markets.

Malaysia was no exception. We know that in these kinds of situations (and we have been through many), there will be a temporary phase of panic selling. Investors would dump their shares at the market open, causing an immediate loss of liquidity in some stocks. This causes the stock to fall faster.

Now, back to DAYANG. The stock had already gone through a major pullback from a recent high of RM1.70. On the previous Friday, it dropped to RM1.33, with steady selling activity throughout that whole week.

As a general rule, momentum stocks like DAYANG (which outperforms the broader market during the good times but also falls harder during bad times)  tend to lose their liquidity quickly in a market panic scenario. For us, that meant a contrarian opportunity would present itself. 

We fully anticipated DAYANG to fall further on the 25th when the Asian markets reopened, bringing with them the panic and general market negativity.

You may ask: how did we pick DAYANG? Simple: we've always been watching it, although we didn't go into all the craziness when the stock skyrocketed. (Editor's Note : we say 'craziness' but for traders, such movements are not a bad thing)

These two factors - a panicky market and a weakening momentum stock - provided us with a great chance to come in and buy into the weakness. Our general strategy is simple as we are anticipating the following scenarios to occur, one by one, if our trade was to turn a profit.

1) The entire market opens weakly.

2) DAYANG's price would fall lower and quicker as investors dump their positions.

3) This means there's a chance for us to buy into DAYANG at below RM1.30 levels. This represented a 20% price discount from the recent peak of RM1.70.

4) We accumulate a position before the market recovers and buyers return.

5) Buying interest should return faster and stronger when the share price goes back to its breakeven point (Friday's closing of RM1.33). We know this by experience.

6) Our almost assured minimum profit is that spread between whichever price we bought into and RM1.33. The rest (any price beyond RM1.33) is bonus profits.

7) We will try to sell at a profit on the same day the trade is made. Small profits are OK, but we'd like to target at least 5% in returns.

The following is the 5-minute price chart for DAYANG on 25 March, from 9:00AM to 2:35PM. We bought into the shares during the market weakness phase (in the first hour of the market open) and sold shortly before lunch, assuring us of some well-deserved lunch money (we go hungry faster when markets are volatile).


You can probably guess : the seven things we anticipated actually became reality, one by one. But they are not about correctly predicting seven disparate things. It's about understanding the chain reaction and what comes next. From this we apply our trading strategy, with full intent on exiting at a profit as planned. We had no interest of taking this position further (you can probaby guess: the stock went up a lot further than our exit price point). (Editor's Note : Since 25 March, the stock has barely gone further. As of 4 April, it peaked at RM1.44)

But still, a 5% return on investment is excellent. Within 3 hours? Just as great.



Outcome
Gross profit : RM1,056
Return on investment (ROI) : 5%
Duration : Intraday, 3 hours











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