Wednesday, February 27, 2013

SINA: Bear signal on Chinese Internet giant

Update: I closed the position on March 22 at $50.75 when the price crossed above the 10-day price channel, for a 1% loss on the underlying stock price. The entry price on the underlying was $51.26. My initial vertical credit spread produced a 13.2% profit on the risk at entry, compared to a maximum potential gain of 31.6%.

The Chinese online portal and social media company Sina Corp. (SINA) has broken below it's 20-day price channel, sending a bear signal amid a retracement of a rise that peaked a weak earlier.

The rise carried the price from $41.41 on Dec. 10 up to $58.77 on Jan. 24. From that point the price retraced almost to the lower price channel boundary, but then rebounded to a new high of $59.60 on Feb. 29 before tumbling through the lower boundary, $51.91, on Tuesday.

The stock continued to trade below that level the next day, confirming the bear signal.

The chart is strongly biased to the bear side.

SINA has broken out to the downside 17 times since January 2009, when my data begins, and 52.6% of those breakouts has produced a profit, averaging 14.5%. Adjusting the average profit by the success rate produces a score of 7.6%, well above the 5% minimum that I prefer.

In the past year SINA has produced bear signals three times, two of which were profitable.

The retracement carried the price to a lower low, breaking the near-term uptrending pattern. Longer term, the price has been stair-stepping downward since peaking at $147.12 in May 2011.

However, today's trading has gone nowhere. It's not quite the spinning top hesitation pattern on a candlestick chart, but it's close to, suggesting that the very near term decline may have, momentarily at least, run out of energy.

Sina's micro-blogging social networking service, Sina Weibo, has more than 140 million users and holds around 57% of that Twitter-like medium's market in China. Along with Baidu and Tencent, the Shanghai-based Sina is a major player in China's Internet media market.

Its primary exchange for trading is the U.S.-based NASDAQ.

Despite the bearish chart, analysts are strongly optimistic about Sina's prospects; their collective opinion gives the stock a 62% enthusiasm rating.

Certainly, that sunny optimism isn't backed up by the financials. Return on equity the most recent quarter was a negative 0.14%, and the quarter before that wa a miserable, yet positive, 0.33%.

The company reports no long-term debt, but still, a company with high analyst ratings and hardly any returns is a classic: An Internet stock trading on stories and dreams rather than performance. Which is OK, of course, if you like that sort of thing.

Quarterly earnings were depressed in 2012 compared to 2011, and 2011 was down compared to 2010. The company is making money -- SINA has shown a loss in only one of the last 12 quarters. Earnings have shown positive surprises in 10 of the last 12 quarters, and negative surprises in two.

Institutions own 72% of shares, and the stock price is extremely high: It takes $6.54 in shares to control a dollar in sales.

SINA on average trades 3.6 million shares a day, sufficient to support an excellent options grid with open interest in the three- and four-figures. The front-month at-the-money puts have a fairly narrow 2.5% bid/ask spread.

Implied volatility stands at 45%, near the low end of the six-month range. Volatility was rising through Tuesday's breakout but has declined sharply today.

In the analysis that follows I use two standard deviations in several places. Two standard deviations is the width of a price range that will contain 68.2% -- about two-thirds -- of trades.

Options are pricing in confidence that 68.2% of trades will fall between $44.46 and $57.86 in the next month, for a potential gain or loss of 13%, and between $47.94 and $54.38 in the next week.

Trading in options today is rather sluggish, with both calls and puts showing volume about a third of the five-day average. This is another argument in favor of the idea that the decline, for now, has run out of steam.

The fair-price zone on today's 30-minute chart runs from $50.79 to $51.46, encompassing 68.2% of transactions surrounding the most-traded price, $51.20. SINA is trading at about the most-traded price with two hours left in the trading day.

Sina Corp. next publishes earnings on May 13.

Decision for my account: I've opened a bear position in SINA, structuring it as a bear call spread, short the April $55 calls and long the April $57.5 calls. The position is profitable at a price at expiration up to up to about $55.60, with a potential top yield of about 32%.


My trading rules can be read here.  A discussion of recent modifications to my trading methods, which haven't yet been incorporated in the original write-up, can be found here.

And the classic Turtle Trading rules on which my rules are based can be read here.

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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