Wednesday, April 11, 2012

CISG: Upside reversal

CNinsure Inc. (CISG) is an insurance services company headquartered in Guangzhou, the city which, under the name Canton, served as the Chinese gate way for Hong Kong when it was a British colony.

Insurance services means that CNinsure provides the sales for and insurance adjustors for companies that underwrite insurance policies. In addition, CNinsure owns controlling interest in several insurance underwriters.

CISG had the most interesting bull chart among 18 stocks added today to the Zacks top-buy list. I say "interesting" because on a day where everyone else is recovering anemically from yesterday's sharp price drops, CISG is experiencing a strong upside reversal at the end of a long slide.

Most of the charts I reviewed were in uptrends, but their bullishness looked quite bit like yesterday's news.

But a word of caution up front about CISG. As goes the Chinese economy, so goes CNinsure. It's markets are domestic. And the conventional wisdom on the Street is that the Chinese economy is heading toward a correction.

That's a long way of saying that today's breakout can easily become tomorrow's failure.

CISG has been on the decline for nearly two years, which two corrections slowing the fall. The most recent major leg down picked up momentum last August and in a month carried the price down from $13.10 to $6.09.

Since then, CISG has oscillated sideways between about $6 and $9, wich the most recent low happening yesterday (April 10) at $5.90.

Today the price leaped up to $6.37, or 8%, unprompted by any news. It has since pulled back as shorter-term traders take profit but remains well above yesterday's trading range.

I called the movement a reversal because the price hasn't broken past any resistance yet. The prices to watch are minor upside corrections peaking at $6.68 on March 27 and at $7.12 on March 19.

Major resistance stands at $7.45, the March 13 reversal of a sharp rise that carried the price up 24%.

The cautious trader won't give CISG a glance until the price has broken decisively above $7.45. The more aggressive trader will see the run up to resistance as a 20%+ opportunity for profit and will enter now.

The company's finances are fairly abysmal. Return on equity is a negative 15% -- that's a loss on equity.  Early reports in 2011 were positive, however, at 8% and 11%. So perhaps this is siply an anomaly. The company caries no long-term debt.

Institutions own 42% of the U.S.-traded shares. The price is has a low premium. It takes only $1.23 in shares to control a dollar in sales.

Quarterly earnings have been all over the map, without a trend.

Like many foreign companies trading as depository receipts on U.S. exchanges, CISG is not very liquid. On average 119,000 shares are traded each day.

As one would expect, CISG's options inventory is limited, with wide bid/ask spreads and low open interest. That for me means that CISG would be a shares play, with poor opportunities for insuring the position with out-of-the-money puts.

Implied volatility stands at 75%, in the mid-range of its track this year. It has been on a gentle decline since mid-March. There is a 68.2% chance that the price will close between $4.94 and $7.74 a month from now, a wide range, but that's what such high volatility means.

CNinsure will next publish earnings on May 23.

Decision for my account: The financials are horrible, and the bullishness of the chart relies on one day's price rise, hardly an unambiguous trend. It is at this point that most analysts will issue a stern warning: "This is a speculative play that carries great risks." But in my experience, that applies to any market position, no matter how "conservative". 

For my part, I want to see a trend -- no just one day -- before entering. So a higher high and higher low on Thursday, in relation to today's trading range, would increase my comfort with opening a shares position. A third high-high-higher-low day would let me label it an uptrend. Until that happens, then I'll bide my time and not open a position.

I screened the stocks using a tourney bracket with a one-month daily chart and a three-day half-hour chart, and then turned to a five-year weekly chart for the broad context in analyzing the bracket winner. See my essay "10,000 Charts" for a discussion of my screening methods.
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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