Wednesday, 22 May 2019


Die already lor. Source.

We have a naughty confession to make : we are perma-bears

Always bearish, glass half empty, the world is going to collapse soon. Our inclination is to be negative on the market, though it does not stop us from trading.

The signs are everywhere. A frothy bull market globally on ever lower liquidity. Risk is seen as completely manageable and stable. Cash burning tech unicorns are rushing to IPO at a fast rate. We have enjoyed a 10 year bull market already - something's gotta give.

We have already been bearish since 2016, and of course we have been somewhat wrong since (at least the KLCI has now assuredly entered a bear market). We're already in a bear market, but no one seems to realise it yet. We are pinning our hopes for a continued bear market on... Trump?

But never mind all the signals. We promised to show you what stocks you can plausibly trade in a horribly weak market like last week's, where the KLCI continued its descent to a three-year low. Can we actually identify such stocks? Yes we can.

But before we get to that, you need this to be able to trade in a lousy market : a lot of guts (the gender neutral term) or, a lot of balls (the toxic masculinity term). If you're squeamish, stay away from the market for a couple of weeks. Refresh your state of mind and reconsider. Cash truly is king in such circumstances.

For the long term buy-and-hold investors, they won't admit it but they will no doubt be enduring sleepless nights every time the S&P or KLCI drops 2% in a day.

Now tell us, who is truly married to the market's whims? Value investors, or the traders? *wink*

There's another thing: this post is not about a successful trade. It's about a trade that got away. But we think it is illustrative of the methods that we use not only to find the right stocks, but also to trade profitably in a bad market. There really is a way.

 Yer gonna need 'em. Buy some here.


This subject is fertile ground. We have extensively covered tactics to utilise when navigating a bad market. Our core philosophy is simple: if we can trade a good market, we must be able to trade a bad market as well. A 'bad market' is not a call for 'risk aversion', as it might be to most people, but there is no way you're going to outperform the benchmark yields if you stay on the sidelines with your balls (guts) in your hands.

Simply put, there are  two ways to trade profitably during a bad market:

1) Trade index call warrants (catch the downside) and index put warrants (buy for momentum). Here's a handy guide.

2) Trade the most volatile market leaders, whose stocks are expected to fall the hardest in a downturn (catch the downside). Here's a handy guide.

These methods can be daunting for the average trader. They are definitely intimidating, and could result in third degree burns if utilised improperly. As with everything, you need a concrete plan. 

Index linked warrants (our favorite is the Hang Seng - more volatile, more money) deserve an entire thread of its own, so we'll focus on stocks for now.

STEP # 1 : Find That Stock

So, what's a good stock that has been going through some crazy movements lately?

You guessed it! It's the Bandar Malaysia stocks - EKOVEST and IWCITY. Here's a handy guide on how we almost blew up this trade.

Why these? Simple: they enjoyed the most active trading lately, coupled with volatility (to the upside), strong price movement - you name it. 

On the flipside, panicky investors would rush to exit these stocks when the market suddenly drops. The more panic, the faster and steeper the price decline. 

And you can buy into the stock when it's declining steeply, because you have already identified that it is artificially mispriced! Sounds easy enough?

Let us demonstrate. This was on 14 May, where the KLCI was hit so badly by the fall in US markets that the index dropped 27 points at one point that morning.

 Sad face :(

Now, it is clear why we chose the stock. It's also clear why we cancelled the above order for EKOVEST-WB; a lack of scrotal gumption.

Buying would have been the absolute right thing to do. We would have nailed it.  Within hours, EKOVEST-WB shot up by 16%. In a day.

So by now we have established that balls are important. 

You also have a rough idea of what kind of stocks you should target when the market drops. The 'market leaders' term works both ways; they also lead when everything is in decline.

The fact that they're heavy in trading volume is an assurance that when buying interest does come back, there will be enough buyers supporting your position and carrying it to the realms of profitability.

You could've made a 16% yield when the whole world's markets are collapsing. Imagine that.

However, there's one last component you should consider.

Step # 2 : Crunch the Negative News, Catch the Recovery

We like to say that we can smell fear (except on first dates with that new hot thing from Tinder). It's more of an art rather than science. It helps if you enjoy reading the news and a little bit of geopolitical analysis (don't worry, we're not going to go too much into that).

To illustrate this, understand that market fear always operates within a finite timeline. The lengthier it is, the more the fear will dissipate. Fear is reinforced if new, bad news emerges. But then we will go through this cycle again.

Anticipating the market recovery is all about identifying the breaking point of this cycle. This is simply when there is no more bad news to process in our collective minds. Note that the timeline here is pretty short (mere days, if you want to trade EKOVEST-WB or the index linked warrants), so bear with us.

Yet again, it's all about this guy.

Get off the stage ya noodly-haired orange turd. Source.

As you might have read, the trigger that sparked the recent market declines was Trump's declaration of additional tariffs, on 6 May. To be fair, the Chinese were said to have reneged on some key terms, but we don't really care about that, eh?

Markets went into free fall throughout that week. Everything is in a tailspin, yada, yada, yada. We've seen this episode already.

The S&P 500's decline. Bigly

As an aside, here's what we really think about this trade war debacle, represented in this picture here:

Further definition here.

Anyway, the tariffs kicked in at 12:01AM US time on Friday, 10 May. No last-ditch concessions; more fear. Markets fell further.

On Monday, 13 May, US markets went into another vicious free fall. This was pretty serious. Asia markets are going to be in trouble (bigly!) the following day.

Going into this, we had already anticipated a large fall in the KLCI. We even toyed with accumulating a massive position in EKOVEST-WB on 14 May (alas, we lacked the courage in the end).

Our trading angle is based on the belief that market fear has well and truly peaked. So, going back to the earlier part about the fear cycle, what was the trigger to break this?

Full story here.

So what? Here' why:

1) It took China a full week to announce retaliatory tariffs.
2) These tariffs are fully expected.
3) There weren't any drastic moves by China - they're content with leaving that to Trump.
4) Over the weekend, the Chinese trade reps agreed to continue talks with their US counterparts.
5) There were murmurs of a Trump-Xi meeting at the G20 summit in June, presumably to smoothen things out.

In other words, all concerns have been fully priced in by the market (at this time). There is room for a recovery, and this not only have a bearing on EKOVEST-WB's fortunes, but also the entire bloody global markets.

Did we act on this understanding? Well, we didn't do much, but we did anticipate the short term recovery correctly.

 Note the timestamp!

For lack of a better phrase, the FBM KLCI at between 9:00AM and 9:22AM was in the shits. But shortly after that...

The market did rebound strongly, as we had anticipated. Our application would also have been profitable, had we managed to get into EKOVEST-WB around this time.

By the way, here's how things turned out for the KLCI, by 4PM on 14 May:

These are all the tools you need if you're interested in profiting when the market is lousy. Find the right stock, analyse the market, determine if a rebound is imminent (by reading the news, duh!), and make money.

And if you were smarter than us, you could also have bought the index call warrants...

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