Thursday, November 20, 2014

SINA: Falling with China's economy

Update 2/13/2015: SINA reversed to the upside, wiping out my gains. It peaked today and then reversed a bit. Rather than risk further damage in what shows as an uptrend on the chart, I've closed my position for a loss.

The share price rose by 1.3% over the 85-day lifespan of the position, or a 6% annual rate. My options position produced a -5.2% loss on debit, for a -22% annual rate.

Update 11/20/2014: I've made the trade described below. I had to come up from my original price a bit to get a fill, raising the risk/reward ratio to 1.4:1.

Update 11/20/2014: I've updated the "Decision for My Account" section with a corrected description of the trade. 

Sina Corp. (SINA), the Chinese Internet media company, is pre-eminently a story stock, an entrepreneurial success story on a grand scale within a country undergoing rapid growth amid a transition to free-market structures under a communist government. The paradoxes abound.

SINA broken below its 20-day moving average on Wednesday, amid signs of a broader slowdown in the world's second-large economy. (See Xin Zhou's economic roundup yesterday for Bloomberg News.)

The Chart

I was quite frankly relived to turn to SINA's story after half an hour of analyzing the chart, which at the larger degrees makes very little sense in terms of Elliott wave framing.

Perhaps it is the hidden years that lie before SINA went public. The company was founded in 1998 but didn't begin trading on the U.S. exchanges until 2000. My reading of the existing chart would differ greatly depending upon what a hypothetical pre-IPO chart would look like.

Perhaps it is the reality that when a company is founded, it steps into an existing Elliott wave framework dictated by the impact of the public mood and other forces upon its sector. There is no official starting line for an Elliott wave analysis.

Click on chart to enlarge.
SINA 14 years monthly bars (left), 2 years daily bars (right)
Perhaps it is the distortions of a company operating within an economy that retains aspects of the Maoist command-economy system.

In framing the longer-term chart, on the left, I've chosen to treat the April 2011 peak as the end of a very long rise. It seems likely amid the growing Chinese economy of the later 1990s that SINA would have been in an uptrend.

Also, the sideways correction from 2001 to 2009 looks in form mightily like a 4th wave, buttressing the view that 2011 was the end of an uptrend of very large degree. I've treated the movement after the peak as the beginning of a downward correction in the form of wave A {+4}, which follows rationally from my treat of the 2011 peak as the end of an uptrend.

The right-hand chart, nearer term, makes perfect sense. It is a downtrend in the form of what Elliott called an "impulse wave" -- the classic five-wave movement in the direction of a trend.

The present wave down, wave 3 {-1}, is completing the wave 3 decline from January.  It will be followed by a wave 4 correction to the upside that will take back a portion of the decline from $89.79 and then will continue down as wave 5 to even lower lows. It is a bearish chart, but n upside correction within the next few months would come as no surprise.

The Company

Sina Corp., headquartered in Shanghai, China,  owns Weibo, the Chinese fusion of the Twitter and Facebook genres, whose 500 million-plus registered users on occasion stir the political pot and cause heartburn in party leadership. That heartburn, in turn, leads to occasional restrictions on what can be posted in the popular venue.

Analyst enthusiasm is not especially high, coming down collectively at a negative 17% enthusiasm rating.

The company reports a rather low return on equity of 2%, with debt running at 32% of equity.

Earnings have been profitable in 11 of the past 12 quarters -- the loser was back in 2012 -- but their is no trend to earnings. They tend toward stability rather than acceleration or its opposite.

All but two quarters have produced upside surprises. The most recent of the downside surprises was the 1st quarter of 2014.

The earnings yield is 2.07%, compared to a 2.34% yield on 10-year U.S. Treasury notes. The company pays no dividend.

The "fair" price implied by earnings growth estimates is $6.58 per share, compared to the market price of $37.74 per share. The market premium is 473% above the implied price.

This would be an appropriate place to pause and contemplate, meditatively, the folly of story stocks and their attendant exuberance. I'm considering SINA for a bear play, of course, so exuberance is my friend as the price eventually, and perhaps inevitably, reverts to a level better supported by the financials.

The stock is selling at 48 times earnings and also at a high premium to sales. It takes $3.33 in shares to control a dollar in sales.

Institutions own 45% of shares.

Sina next publishes earnings on Feb. 23.

Liquidity and Volatility

SINA on average trades 1.7 million shares a day on the U.S. NASDAQ exchange and supports a wide     selection of option strike prices space $2.50 apart., with open interest running as high as four figures.

The front-month at-the-money bid/ask spread on puts is 2.5%, compared to 0.6% on the most traded symbol on the U.S. markets, the exchange-traded fund SPY.

Implied volatility stands at 37%, compared to 14% for the S&P 500 index, and is below the low point of the rise up to the most recent high of 59% attained on Oct. 13. SINA's volatility is in a negative percentile related to that rise, the minus-2nd percentile.

Clearly, a trade must be structured with expectation of rising volatility, as a long options spread bought with a debit and expiring in a out month.

Options are pricing in confidence that 68.2% of trades will fall between $33.76 and $43.80 over the next month, for a potential gain or loss of 10.6%, and that 95% will fall between $29.74 and $45.82.

Options are trading slightly on the slow side today, with calls running at 85% of their five-day average volume and puts at 93% of average.

Decision for My Account

SINA has much liquidity and a bearish chart.It is up intra-day today, and although I intend to open a bear position, I won't do so until I see some downward momentum on a small scale.

I intend to structure the position as a bear call options spread, long the $40 puts and short the $37.50 puts, bought with a debit and expiring March 21. The risk/reward ratio is nearly even, at 1.2:1.

The leverage is 10:1.

I'll post an update to this analysis if I open the position. If nothing is posted, then I shall have put SINA on the Watchlist awaiting resumption of the downtrend.

-- Tim Bovee, Portland, Oregon, Nov. 20, 2014


My shorter-term trading rules can be read here. My longer-term trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

From time to time I use the number 68.2% in using applied volatility to calculate the expected trading range. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.

Elliott wave analysis tracks patterns in price movements. The principal practitioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading

Several web sites summarize Elliott wave theory, among them, Investopedia, StockCharts and Wikipedia.

See my post "Chart Analysis: Nomenclature" for an explanation of my method for labeling waves on the chart.

By preference I place my shorter-term trades in the last half hour before the closing bell in New York. See my essay "When is the best time to trade" for a discussion of the practice.

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 decisions for his or her own account, and take responsibility for the consequences.

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