Tuesday, July 23, 2013

Range-trading during a period of uncertainty

As Im writing this, PSE index is only 4 points away from 6800. Many 'investors' that were left holding the bag at above-7000, those shell-shocked by the sell-down of foreign funds last month, are starting to smile again. Im partially one of those investors. I chose not to cut loss, or I did not cut clean on most positions, and was only able to 'save' about 20% of my cash. That obviously was a bad move.

But I elected to pool a smaller fund, open another account in another online broker (to sort of start in a clean slate), still trade actively during the uncertainty, and focus on a few securities only, with two criteria: no bazurs (no BHI, no CAL, no TSI, however hyped they are in forums) and no lightly-traded security (no ANS, no SGI).

I profited a good +6.3% (of capital) taking advantage of predicted range trend in MBT, GLO, TEL, DNL, SCC, and VLL and partially (small one-time impacts) in ABS, BDO, ALI.  For example, I was able to go back and trade TEL four times, in the span of 4 weeks. I bought in tranches at 2830 and prices below and then immediately sold whatever I accumulated at 2930ish--no questions asked.

I would like to think that Im an expert with these moves that are suitable in an environment of volatility, but in truth, as most transactions in the stock market, these are all just bets. There were some rational bases, but luck (more like winds going in your favor) still is the bigger factor.

Nevertheless, if you ask for the bases and rules that I used, . Here they are:
1) took on faith that TEL and others are solid companies that is undeservedly cheap at their prices at that time, especially because there's the backdrop of an unusual, severe sell-off. For TEL, below 2830 was my set price. MBT and AEV at one time went below 10 P/E. And the circumstances (caused by merciless sell-off) were abnormal; these should not be their prices as normalcy returns.
2) forecasted that big bulls and bears are going to fight during that time of uncertainty, so small-time investors can benefit from their tussle.
3) when you observe even the daily trade, volatility was apparent. you can place a bid on the perceived lowest before price jumps again and then return to same number (some call these levels true 'strong' supports) in these daily trades and aim to exit in 3 days.
4) for GLO and TEL, I also relied on the fact that these are high-dividend paying securities, and that this fact would also be in the mind of players foreign or locals alike. Remember that if dividend yield of a stock is 4% of its price, you can be comfortable easily a loss < 4%. We know that GLO, TEL, SCC, Aboitiz stocks, MER, are generous in giving out dividends.
5) also held on to our recent gdp announcement --  +7.8%. You dont see that gdp number brandished every day at any part of the world!
6) also disciplined myself to be at least 30% on cash at any given trading day. At one point, after a previously-set sell points on two big positions were hit while I was on a beach, I was only 26.66% invested.
7) buy in tranches, ready to average down if needed. If your revolving capital is 1 M PhP, buy in amounts of 20 K - 30 K PhP. If 500 K PhP, buy in 10 K - 20 K PhP tranches. This is also optimum to avoid inefficient transaction fees.
8) lastly, again... no bazurs , no lightly-traded stocks.

So there, the reasons for my big gains in just 5 weeks.

But, as a caveat, there were downsides and mistakes:
> VLL, TEL, DNL, GLO, have now increased significantly since I last unloaded them, so there are still that couldve-been shouldve-been imperfect calls, bottomline. No remorse from my side, but trend traders would surely fault my method for not taking full advantage of the trend.
> I also made a mistake in buying and averaging-down on GMA7. The media stalwart aligns with #1 and #4 conditions,  but not #8, GMA7 is a non-bazur but it is very lightly traded nowadays. So this bad move was caused by not following set rules completely. Matigas lang talaga ang ulo (inborn stubborn).  
> MER was also a mistake, but it was caused by extraordinary circumstances prodded by SMC.
>> BUT Im still holding Kapuso and Liwanag. The loss in both after averaging down is not even 4% at present. So obviously, these are not staggeringly as bad a move in terms of impact.

Although, again, on hindsight, these are gambles. 'Expert' traders (like CANSLIM practitioners) will tell you never to come in when there is no clear market uptrend. However good the individual stock is, it will get pulled down by negative sentiment. If the volatility had a downward bias on medium term, if Bernanke firmed-up on his decision to ease QE by end of the year and did not become sheepish on his most recent testimony to the US Capitol, I could have been holding another portfolio set showing nothing but paper losses.

Good luck with your trades. The battle continues.

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