No Random Walking!

... in a very ugly market after the company released earnings today. Why did JRJC go up? Because it is a cheap stock in a growing market with new revenue sources in the near term. That's a lot of information in one sentence and let me explain:

1. With a forward 12-month earning of over $1 per share, its P/E is about 20 even after the rise today. This P/E is about half of P/Es of other internet companies like SINA and SOHU. So it is relatively cheap. 
2. There are increasing number of people getting into stock market now in China. The fact that the market has been very volatile lately in China actually helps JRJC because more people need more information and more services that JRJC provides.
3. The company has just released a couple of new products ?????Top View, ...). I've no idea how good these products are, but it is a new revenue source nevertheless. Plus, the margin should be very good (it is just software after all). 
• This actually reminds me of Sohu a year ago when Sohu released its online game ?????? By my observation, ???? was just one game of average quality in a very competitve online game market and it was offered "free", yet SOHU was making a lot of money out of it. The reason: China is BIG! You do not need to have a very high quality software to make a lot money!!!
• Marketing is probably more important than anything else. [A counter-example: my charting program is probably among the best of its kind in the world yet I am losing money on it!] 
4. Another catalyst is the company's aliance with China Telecom.
5. High short interest may have contributed to the rise lately, thanks partly to the bashing by wall-street analysts.

JRJC will continue to be very volatile, but I like its chance going forward.

Link to Weekly Chart of JRJC

Many Chinese companies reported earnings during last couple of weeks. So far BIDU, JRJC, LONG, NTES, PWRD, SINA, SNDA, SOHU, PWRD and UTSI all issued great earning reports and most of these stocks jumped after earnings, especially for those with reasonable P/Es. The solar players' earnings were great also but not enough to satisfy the market.  [Companies that will report next week are: CMED, CTRP, HMIN, MR and JOBS.]

In the long run, companies' stock converges to its fundamentals. A good trading stragegy would be to wait till a time of stress like now and scoup up companies with low P/E, such as AMKR, OVTI, PLXS and SNDA and use charts to guide future decisions.

Of course this is just one of the many workable strategies, and it's one that requires good patience because hard times typically occurs only two or three times a year. During the long-time wait, it is very important to follow the companies' development.

Another strategy would be to buy turn-around plays when the technicals turn positive. Again, patience must be needed because such companies can stay "cheap" for a long time. UTSI would fall into this category. The company's downturn lasted for years and, finally when the market becomes tough, it stood strong simly because its asset value exceeds the market cap. UTSI's technicals became positive since the start of the year and has stayed strong since then.  

... since it its former CFO died from swimming accident. Late to the party, but I still shorted the stock today on "good news" that it has purchased popular web browser Maxthon, bearish technials and high P/E.  I am still long on most other Chinese web stocks, so shorting BIDU is really a hedging strategy.

In the current market, I would favor value over growth, and strong performers over weaker oners.

On another note, IVN is behaving just like Shanda a couple of years ago. An analyst downgraded the stock and it fully recovered several days later. In the following six months, SNDA would triple the share price. I am not saying IVN will triple in price, but the gradients are there for it to explode further.

From now on, in the default daily chart setting, there will be another color-bar indicator just below the one that was introduced two weeks ago. Their differences lie in the number of variables used in the calculation. For the new indicator, there are far more variables used, resulting in fewer false breakouts (in most cases).

The small experiment started weeks ago is becoming a very exciting project. The algorithm that I developed is so flexible that it allows us to integrate any number of variables about a company or a market index. Not only can these variables be technical indicators but can be fundamental data as well. In reality though, variables should be carefully selected so that they contribute to better predictions while not causing over-fitting.   

In the meantime, the market is doing great, especially the energy and gold groups. Is Hong Kong turning up also?

MySQL, the database server software that powers this very blog as well as my charting web site, is being acquired by Sun Microsystem. It's amazing that a free software that was developed by volunteers can command a $1 bil price tag. As the CNN artile says, maybe this signifies the beginning of a new business model. 

Source: Open Source, Big Deal: MySQL's $1 Bil Payday

I wonder why they both went up big today. Except for the fact that they are all founded by the same guy, the two companies are in very different businesses. IVN is in gold mining, while IVAN's prospect is in heavy oil recovery technology. 

Amkor, Brocard, Harmonic, Plexus, and now NetEas????and SINA! 

This kind of themes are being played again and again ...

A previously strong-performing stock went down with the market during the sell-off several weeks ago. Yet its earning report came great, resulting in price surge afterwards.

This shows that, despite of the negative reports about subprime debts, consumer confidence, unemployment rate, etc, the economy is not as bad as feared. A lot of companies are still make record or improving profits. That's why we should focus on individual businesses, ignore the headline market news, or better yet, make use of the opportunities that arise.

Speaking of NetEas (NTES), it is still making a lot of money from that single game?????? after so many years! Its P/E is only 15.

In other development, gold's run resumes ... SINA reports great earning also (P/E around 30)!

I don't day-trade and I am not advocating day-trading here either, but that doesn't mean that I don't use intra-day trading information. Today's action in Rentech (RTK), the company that I wrote about yesterday, offers a very good example of money flowing into a stock, especially an out-of-favor small-cap stock like RTK:  

1. For whatever reasons(see notes below), one or many professional investors/traders decided to buy RTK at this price level.
2. Since the stock is out-of-favor and thinly traded, he was able to make sure that the price stayed as low as possible while accumulating shares from whoever decided to sell. For most of the day, RTK was down as much as 3% while the market was up over 1%.
3. Only after 2pm eastern time, the buyer becomes aggressive and bought all the shares available. The result is increased volume and price in the afternoon. Some traders would start the process at 11am if he is very aggressive and there is greater urgency to accumulate the stock.
4. The stock would close up over 3% for the day, near the high end of the day's trading range.

All the above information tells us is that someone professional trader is accumulating RTK (Retail investors tend to trade in the morning especially after the open). However it doesn't necessarily mean that he is doing the right thing. Nor does it mean the price will definitely go up in the future. But it is a good piece of information nevertheless. It is a bullish leading signal if it is consistent with the story that you believe and with the technical picture in a longer period.

As a result of today's trading actions, RTK is technically positive now as the color bar turned from orange to green today, even though many trailing indicators are still negative. Notice that the money flow indicator is ticking upward too.

Follow-through: as your model is validated, you may add shares. Action accordingly as more data come in. What will happen in the longer term will be determined by the company fundamentals and market conditions.

*** NOTES ***

#1: You would notice the same pattern yesterday.

#2: Volume is important also.

#3: This kind of data work best for small-cap story-driven stocks, and less important for large-cap stocks of companies that have multiple revenue streams.

#4: People buy or sell stocks for many reasons. In RTK's case, this could be the following:

• Some one saw what I saw in the fundamental of RTK and decide RTK is undervalued.
• Short-covering.
• News-driven. For example, the company gave a presentation this morning in an investment conference.
• For technical reasons. The buy may be simply following other buyers. Even a small investor like us can sometimes trigger a enthusiastic though short-lived interest. [Try to buy 5000 shares of a thinly traded stock at market price. You may be surprised at what follows!].
• Manipulation. Some traders would accumulate a stock and, days later, issue positive news such as upgrade on the stock and sell to new buyers.

I am so far very happy with my new indicator, which has the potential to replace most, if not all, other indicators. With only one indicator to use and because the colored bar is so intuitive, the decision making process becomes much easier, more objective and more consistent.

Though technically still trending down, I am starting to accumulate Rentech (RTK) now. The reasons:

1. RTK is still being treated as a pure coal-to-liquid technology play and CTL is going nowhere in the US. However it actually has a thriving ammonia nitrogen fertilizer business in Illinois (pictured) that generates close to $200m in revenue a year and $40m EBITDA that supports its R&D in CTL technology. With a market cap of only 220 mln and that the street is generally using a EBITDA/price ratio of 5-9 in valuing fertilizer companies, RTK seems dirt cheap even if you consider its technology and existing relationships with its partners worthless.

1. The cost story and catalyst #1:  the company is losing money now mainly because of the expenses for building its demonstration plant (PDU) in Colorado ($14m  last quarter alone). However if the company sticks with its schedule, the plant will be completed in this quarter. That means bulk of the expenses will be gone from next quarter on. The income statement and balance sheet will look much better then.
2. Catalyst #2: CTL technology is down but not out. Oil price will remain high. There could be change in perception of the CO2 problem related to CTL in Washington and in the industry. Any potential license agreement with power companies or the defence industry is a plus. Without them, RTK should continue to survive.
3. RTK is technically still trending down, but with the help of my own charting tool and a pair of rosy glasses :-), I start to see positive money flow now.

Main negatives: (1) Too many expensive projectes planned. (2) Need to raise over $450m soon for another plant. and (3) There are so many outstanding shares (165M) !!!.

It's said that the market moves three to six months ahead of earnings. Hopefully I am the one who see the free money before the general market's does.

P.S.: Other observations: stocks acting strong: AMKR, BHP, BRCD, GEOI, GDX, GLD, IOC, LOCM, NTES, and UTSI. Interestingly all of them have positive return in this challenging year. On the other hand, most of the solar energy companies, which were high fliers last year, are crashing down.