No Random Walking!

Avon Products ???, AVP?zoomed almost 18% yesterday after it reported earnings more than doubled from last year on strength from the emerging market.

For a long time I thought AVP is one of the best China-plays (another is YUM Brands). Visit any street or a department store in big Chinese cities and you will likely notice a Avon store selling an array of beauty products to increasingly affluent Chinese ladies. (Another US player NuSkin is much less popular even though it got a direct-selling license years ago from the Chinese government. I attribute Avon's success to its Chinese name ????, which is more appealing to that of NuSkin ????). 

Technically speaking, the chart had been a beautiful one prior to the  post-earning gap-up. The weakness since May due to market correction has turned out to be a buying opportunities. Even with the 18% surge yesterday, it's forward p/e is still less than 20!

It's definitely a long-term play (even though I have to admit that it is not my kind of stocks!).

To me following the market is just as fascinating as following NFL or the games the teams play in a season. Highly anticipated, hard to predict but never boring. Recently there are so many interesting sessions with some small to micro-stocks such as GEOI, JRJC and SIGM that I've been following. They are so interesting that I probably can use them to write a case-study report on how to invest in illiquid micro-stocks! I don't know if I have enough time (and passion) to finish this "report", but I will try anyway. More to follow.

Title: Text Data Mining: Theory and Methods

Author: Jeffrey L. Solka

Link: http://arxiv.org/PS_cache/arxiv/pdf/0807/0807.2569v1.pdf

Abstract:

This paper provides the reader with a very brief introduction to some of the theory and methods of text data mining. The intent of this article is to introduce the reader to some of the current methodologies that are employed within this discipline area while at the same time making the reader aware of some of the interesting challenges that remain to be solved within the area. Finally, the articles serves as a very rudimentary tutorial on some of techniques while also providing the reader with a list of references for additional study.

http://webtecker.com/2008/04/22/8-best-open-source-shopping-cart-solutions/

In the home page of norandomwalking.net, I've replaced the USD/CNY exchange rate chart with the one for the CBOE Volatility Index (Symbol: ^VIX), which is also called the "fear index".

VIX measures the implied volatility of SPX500 index options. If it is too high, say, above 30, it's said to have too much fear in the market place and maybe it's a time to buy. Otherwise if it is too low (say below 15?), there is too much complatency in the market and a correction may be due. It was very accurate decades ago when it was "invented". Nowdays it only works for 60-70% of the time when used to call the market bottoms (or peaks) because everybody knows about it!

The chart below shows the VIX vs. SP500 index during the great dotcom bubble.

The charts below show the VIX and SP500 index during the last 12 months.

Notice the inverse-correltion of the two indices (peak vs. trough). There have been 5 VIX peaks during the 12-month period, each corresponding to the bottom of a market sell-off.

The last time that VIX reached above 30 was actually yesterday at the open. Time to buy US stocks now? The answer: not necessarily! Three things to remember: (1) the market can go even lower; (2) remember it only works 60-70% of the time; and (3) very importantly the market is made of many different sectors that may perform very differently in different stages of a market cycle. For eaxmple, now may be the time to buy tech and financial stocks, but to sell oil, or vise versa.

[Updated:] Additional company names

Aluminum: Is the most abundant metal element in the Earth?s crust. Bauxite is the main source of aluminum. Aluminum is used in the United States in packaging, transportation, and building. Guinea and Australia have about one-half of the world?s reserves. Other countries with major reserves include Brazil, Jamaica, and India. ?Mineral Information Institute)

Bauxite: A general term for a rock composed of hydrated aluminum oxides. It is the main ore of alumina to make aluminum. Also used in the production of synthetic corundum and aluminous refractories. ?Mineral Information Institute)

Bauxite in China: ???????????????????????????????????????????????????????????????????????????????

Related Companies: Alcoa (AA), Aluminum Corp. of China (ACH), Century Aluminum (CENX), Kaiser Aluminum Corp (KALU), Superior Essex (SPSX), Tredegar Corp (TG) ?????,?????????,??????????All US-traded companies have seen share prices dropping sharply in last 3 months, while all A-share companies' prices are increasing lately. During the time, aluminum price reached record-high.

Recent Events: Power shortages in Shanxi pushed up aluminium prices on the London Metal Exchange MAL3 to a record high of $3,327 a tonne on Monday due to worries over supplies from China, the world's top aluminium producer. (Reuters)

Above: One-year chart

Below: Five-year chart

Observations and comments:

1. Best performers - recently: oil, gas and aluminum; Worst: platinum.
2. Best performers - five years: copper and oil. Worst: aluminum.
3. Most volatile - five years: natural gas and copper.
4. Natural gas price crashed in 2005/06, recovered powerfully this year.
5. Oil and gas moving pretty much in tandem last year.
6. Copper has had a two-year consolidation period. Breakout now?
7. Recently the prices are negatively correlated with the strength of US dollar and positively correlated with the inflation rate: holding resources stocks may be a way to hedge against inflation and a possible crash in the green back.
8. The commodities have their own market, currently a boom market, that is very different from the broad market.

Commodity prices world-wide are diving, yet the stocks of the Chinese mining companies are doing extremely well these days ...

The chart of almost every one of these companies chart looks like the one below (2-month chart), which displays a very powerful, time-tested high-probability pattern (this pattern is so important that it really should have its own name!!!):

The company?????? has dropped all the way from a high of $98 nine months ago to a low of $16 about three weeks ago. Most of that long period there should be no business of buying that company, as shown in my chart: no guessing, no hoping and no trying luck! The most interesting thing occurred in early June, when a divergence (????between the price and the RSAP line started to form, signaling that the bottom is near. As a result, the strength bar ?????turned green while the price continued to drop from $23 to $16, albeit in decreased volume. The price finally start to rise in late June, accompanied by increased volume, resulting in the "trigger bar (????" turning to orange and, later, to green.  That period from late June was the best time to buy and now is the time to add more or hold!

As I said, almost all mining companies in China are showing such a pattern. Considering the deep drop (60%) we've seen in the A-share market, I think this trending-up will be very powerful. Buying any of these mining companies will pay off handsomely. The risks are many, not the least the sharp drop of the commodity prices in the international markets. However, buying them now is a disciplined, low-risk action. If it doesn't work out, no big deal: just sell!

Noticeable mining companies: ???????????????????????????????????????????????????????????????? and others?

One more note: China is to impose "resource tax" on these companies, which partly explains the share price drops in last several months. However the prices have dropped so much that a lot of these companies are having a p/e below 10. The expected tax increases are probably factored in already.

One observation on the new round of market melting-down:

It's the previous high flyers and story plays that are getting crushed while the stocks with already low multiples are holding up pretty well.

Examples of previously high fliers: All Bakken shale plays and all oil sands plays. All down about 10% today.

Examples of stocks with low multiples already: UTSI, SIGM, GEOI, JRJC, PLXS.