Sunday, March 22, 2015

Regulations: how China stock market works




   The Shanghai Stock Exchange – the first stock market of the People’s Republic of China – opened on November 26, 1990. On April 11, 1991 the Shenzhen Stock Exchange was established. Concern about the potential negative influence of the securities markets on social stability led the Chinese government to impose price limits at the beginning: upper and lower price limits were imposed on both A and B shares on July 27, 1990. However, in the first few years, the stock markets were very quiet and trading was very thin. To stimulate their development, the government withdrew its price limits on May 12, 1992 and adopted a free trading policy until December 16, 1996. From 1992 to 1995, the securities markets were overheated and there were many speculative activities. Due to the same concern about social stability and the healthy development of the market, the Chinese government restored the price limit policy on December 16, 1996, and price limits remain effective.
    Both the SHSE and the SZSE are order-driven, with no market makers or specialists. The price limits are set at +/-10% of the preceding day’s closing price. There can be no special announcement from the company when its price hits a limit. However, the trading screens of the stock exchanges do indicate when a price limit has been hit. During the trading day, if a stock hits its price limit, then it is allowed to trade as long as the next order is within the prescribed range. It is worth noting that the SHSE and SZSE price limits are mainly boundaries, but they can become trading-halt triggers. If a stock hits its price limits for three consecutive days, then it is suspended. Once the stock is temporarily suspended, the board of directors must provide the reason for the abnormal fluctuation in stock price to the stock exchange. The stock can resume trading until the afternoon trading session on the day when the company makes its announcement. The tick size of stocks that are listed on the SHSE and the SZSE is fixed at RMB 1 cent regardless of the current stock price, e.g., the next bidding price of a RMB ¥1 stock could be RMB ¥1.01, while that of a RMB ¥100 stock could be RMB ¥100.01.
  The SHSE and the SZHE open from Monday to Friday. Each exchange has two trading sessions: the morning session opens at 9:30 and closes at 11:30, and the afternoon session begins at 13:00 and ends at 15:00. Two different shares are traded on both exchanges: A shares and B shares. A shares are available to Chinese citizens only, and B shares are available to foreign investors. 
  The SHSE and the SZSE operate under similar legal and regulatory environments; however, some previous studies on the Chinese markets suggest that investors appear to be biased against firms listed on the SHSE; see, for example, Chakravarty et al. (1998). For the price limits issue studied in this paper, we also conduct all the tests for the SHSE and the SZSE separately and find no significant difference between the results for the two stock exchanges. Therefore, we only report the results for the combined stock exchanges. The Chinese stock markets have grown rapidly over the sample period. The number of listed stocks increased from 530 in 1996 to 1287 in 2003, while the total market capitalization rose from 104.8 billion RMB 1992 to 4245.8 billion RMB in 2003. Table 1 reports some basic statistics for the Chinese A share markets. 

Sunday, January 18, 2015

Professional opinion

Was reading some material and found this article.


Couple of things to notice:

  • publish date ....and time. Why so late at night? Was nothing interesting on TV or no interest in drinking beer at the bar? . Then answer is - it's probably a scheduled publishing bot. But still, why not click the button "Publish" yourself during normal business hours? Leads to idea that majority PRs are well planned and scheduled projects.
  • date of the article where well known professional, for free, shares his observations is exactly the end of pullback on chart. Not a bad call! :-) keep it coming!

Notes after reading the book "Reminiscences of the stock operator"

Bellow are copy-paste's from the book "Reminiscences of the stock operator" that I think are valuable thoughts, methods or ideas. Here we go:

Patience
No man can always have adequate reasons for buying or selling stocks daily. The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street.
A speculator who loses his temper is a goner.
No man can consistently and continuously beat the stock market though he may make money in individual stocks on certain occasions. No matter how experienced a trader is the possibility of his making losing plays is always present because speculation cannot be made 100 percent safe.


Confidence
A man may see straight and clearly and yet become impatient or doubtful when the market takes its time about doing as he figured it must do.
A man must believe in himself and his judgment if he expects to make a living at this game.
Without faith in his own judgment no man can go very far in this game.
That is about all I have learned to study general conditions, to take a position and stick to it. I can wait without a twinge of impatience. I can see a setback without being shaken, knowing that it is only temporary.
A man cannot be convinced against his own convictions, but he can be talked into a state of uncertainty and indecision, which is even worse, for that means that he cannot trade with confidence and comfort.
A speculator must have faith in himself and in his judgment. The late Dickson G. Watts, ex-President of the New York Cotton Exchange and famous author of "Speculation as a Fine Art," says that courage in a speculator is merely confidence to act on the decision of his mind.
My business is to trade— that is, to stick to the facts before me and not to what I think other people ought to do.


Learning curve
There is nothing like losing all you have in the world for teaching you what not to do. And when you know what not to do in order not to lose money, you begin to learn what to do in order to win.
It never was my thinking that made the big money for me. It always was my sitting.
One of the most helpful things that anybody can learn is to give up trying to catch the last eighth or the first. These two are the most expensive eighths in the world.
The way to make money is to make it. The way to make big money is to be right at exactly the right time.
Tape reading was an important part of the game; so was beginning at the right time; so was sticking to your position.
The price has nothing to do with establishing my line of least resistance.
You need to be bullish in a bull market and bearish in a bear market.
It is the big swing that makes the big money for you.
A speculator must concern himself with making money out of the market and not with insisting that the tape must agree with him.
It would not be so difficult to make money if a trader always stuck to his speculative guns that is, waited for the line of least resistance to define itself and began buying only when the tape said up or selling only when it said down. He should accumulate his line on the way up. Let him buy one-fifth of his full line. If that does not show him a profit he must not increase his holdings because he has obviously begun wrong; he is wrong temporarily and there is no profit in being wrong at any time.
it is a wise thing to have the big bet down only when you win, and when you lose to lose only a small exploratory bet.
Instead of hoping he must fear; instead of fearing he must hope. He must fear that his loss may develop into a much bigger loss, and hope that his profit may become a big profit.
I naturally think that if it is wrong to be bearish it must be right to be a bull.
Always sell what shows you a loss and keep what shows you a profit.
A trader, in addition to studying basic conditions, remembering market precedents and keeping in mind the psychology of the outside public as well as the limitations of his brokers, must also know himself and provide against his own weaknesses.
Important the study of group-behaviorism is and how its lessons are disregarded by inadequately equipped traders, big and little.
The reputable newspapers always try to print explanations for market movements. It is news. Their readers demand to know not only what happens in the stock market but why it happens. Therefore without the manipulator lifting a finger the financial writers will print all the available information and gossip, and also analyse the reports of earnings, trade condition and outlook; in short, whatever may throw light on the advance.
When you find that it fails to respond adequately to your buying you don't need any better tip to sell. You know that if there is any value to a stock and general market conditions are right you can always nurse it back after a decline, no matter if it's twenty points.
In a bull market and particularly in booms the public at first makes money which it later loses simply by overstaying the bull market. This talk of "bear raids" helps them to overstay. The public should beware of explanations that explain only what unnamed insiders wish the public to believe.


Strategy
The reason for what a certain stock does today may not be known for two or three days, or weeks, or months.
If a stock doesn't act right don't touch it; because, being unable to tell precisely what is wrong, you cannot tell which way it is going. No diagnosis, no prognosis. No prognosis, no profit.
In a bull market your game is to buy and hold until you believe that the bull market is near its end. To do this you must study general conditions and not tips or special factors affecting individual stocks. Then get out of all your stocks; get out for keeps! Wait until you see or if you prefer, until you think you see the turn of the market; the beginning of a reversal of general conditions.
If there is a solid bull foundation, for instance, whether or not what the papers call bull manipulation is going on at the same time, certain news items fail to have the effect they would have if the Street was bearish. It is all the state of sentiment at the time.
When I am bearish and I sell a stock, each sale must be at a lower level than the previous sale. When I am buying, the reverse is true. I must buy on a rising scale. I don't buy long stock on a scale down, I buy on a scale up.
Let us suppose, for example, that I am buying some stock. I'll buy two thousand shares at 110. If the stock goes up to 111 after I buy it I am, at least temporarily, right in my operation, because it is a point higher; it shows me a profit. Well, because I am right I go in and buy another two thousand shares. If the market is still rising I buy a third lot of two thousand shares. Say the price goes to 114. I think it is enough for the time being. I now have a trading basis to work from. I am long six thousand shares at an average of 111 ¾ , and the stock is selling at 114. I won't buy any more just then. I wait and see. I figure that at some stage of the rise there is going to be a reaction. I want to see how the market takes care of itself after that reaction. It will probably react to where I got my third lot. Say that after going higher it falls back to 112 ¼, and then rallies. Well, just as it goes back to 113 ¾ I shoot an order to buy four thousand at the market of course. Well, if I get that four thousand at 113 ¾ I know something is wrong and I'll give a testing order that is, I'll sell one thousand shares to see how the market takes it. But suppose that of the order to buy the four thousand shares that I put in when the price was 113 ¾ I get two thousand at 114 and five hundred at 114 ½ and the rest on the way up so that for the last five hundred I pay 115 ½. Then I know I am right. It is the way I get the four thousand shares that tells me whether I am right in buying that particular stock at that particular time for of course I am working on the assumption that I have checked up general conditions pretty well and they are bullish. I never want to buy stocks too cheap or too easily.
It is unwise to take a full line unless you are convinced that conditions are exactly right. Remember that stocks are never too high for you to begin buying or too low to begin selling. But after the initial transaction, don't make a second unless the first shows you a profit. Wait and watch. That is where your tape reading conies in to enable you to decide as to the proper time for beginning.
Therefore the thing to determine is the speculative line of least resistance at the moment of trading; and what he should wait for is the moment when that line defines itself.
In a narrow market, when prices are not getting anywhere to speak of but move within a narrow range, there is no sense in trying to anticipate what the next big movement is going to be up or down. The thing to do is to watch the market, read the tape to determine the limits of the get-nowhere prices, and make up your mind that you will not take an interest until the price breaks through the limit in either direction.
In a bull market the trend of prices, of course, is decidedly and definitely upward. Therefore whenever a stock goes against the general trend you are justified in assuming that there is something wrong with that particular stock. It is enough for the experienced trader to perceive that something is wrong.
Never try to sell at the top. It isn't wise. Sell after a reaction if there is no rally.
The behavior of a certain stock is all you need at times. You observe it. Then experience shows you how to profit by variations from the usual, that is, from the probable.
I never buy a stock even in a bull market, if it doesn't act as it ought to act in that kind of market.
I don't look out for the breaks ; I look out for the warnings.
Beware of buying a stock that refuses to follow the group-leader.
I am a trader and therefore looked for one sign : Inside buying. There wasn't any. I didn't have to know why the insiders did not think enough of their own stock to buy it on the decline. It was enough that their market plans plainly did not include further manipulation for the rise. That made it a cinch to sell the stock short.
If as the result of my professional work— my manipulation— the price goes up, and if at the highest level there is a good demand for the stock so that I can sell fair-sized blocks of it I of course call the stock.
The most effective way to advertise what, in effect, are your honorable intentions is to make the stock active and strong. After all is said and done, the greatest publicity agent in the wide world is the ticker, and by far the best advertising medium is the tape. I do not need to put out any literature for my clients. I do not have to inform the daily press as to the value of the stock or to work the financial reviews for notices about the company's prospects. Neither do I have to get a following. I accomplish all these highly desirable things by merely making the stock active. When there is activity there is a synchronous demand for explanations; and that means, of course, that the necessary reasons— for publication— supply themselves without the slightest aid from me.
Say, then, that the stock has ceased to advance. There comes a weak day. The entire market may develop a reactionary tendency or some sharp-eyed trader may perceive that there are no buying orders to speak of in my stock, and he sells it, and his fellows follow. Whatever the reason may be, my stock starts to go down. Well, I begin to buy it. I give it the support that a stock ought to have if it is in good odour with its own sponsors. And more: I am able to support it without accumulating it— that is, without increasing the amount I shall have to sell later on. Observe that I do this without decreasing my financial resources. Of course what I am really doing is covering stock I sold short at higher prices when the demand from the public or from the traders or from both enabled me to do it. It is always well to make it plain to the traders —and to the public, also—that there is a demand for the stock on the way down. That tends to check both reckless short selling by the professionals and liquidation by frightened holders— which is the selling you usually see when a stock gets weaker and weaker, which in turn is what a stock does when it is not supported.
the more stock I sell on a reasonable and orderly advance the more I encourage the conservative speculators, who are more numerous than the reckless room traders; and in addition the more support I shall be able to give to the stock on the inevitable weak days. By always being short I always am in a position to support the stock without danger to myself.
As a rule I begin my selling at a price that will show me a profit. But I often sell without having a profit, simply to create or to increase what I may call my riskless buying power.
But I was ready for this selling, and on the way down I bought back the stock I had sold to the traders a couple of points higher.
I took all the stock that was for sale on the way up— it wasn't very much— and the price began to rise a second time; from a higher starting point than 70. Don't forget that on the way down there are many holders who wish to heaven they had sold theirs but won't do it three or four points from the top. Such speculators always vow they will surely sell out if there is a rally. They put in their orders to sell on the way up, and then they change their minds with the change in the stock's price. Of course there is always profit taking from safe-playing quick runners to whom a profit is always a profit to be taken. All I had to do after that was to repeat the process; alternately buying and selling; but always working higher. Sometimes, after you have taken all the stock that is for sale, it pays to rush up the price sharply, to have what might be called little bull flurries in the stock you are manipulating. It is excellent advertising, because it makes talk and also brings in both the professional traders and that portion of the speculating public that likes action. It is, I think, a large portion. I did that in Imperial Steel, and whatever demand was created by those spurts I supplied. My selling always kept the upward movement within bounds both as to extent and as to speed. In buying on the way down and selling on the way up I was doing more than marking up the price: I was developing the marketability of Imperial Steel.
The fear of being left high and dry if he bought, or squeezed to death if he sold, was gone. The gradual spread among the professionals and the public of a belief in the permanence of the market for Imperial Steel had much to do with creating confidence in the movement ; and, of course, the activity also put an end to a lot of other objections. The result was that after buying and selling a good many thousands of shares I succeeded in making the stocks sell at par. At one hundred dollars a share everybody wanted to buy Imperial Steel. Why not? Everybody now knew that it was a good stock still was a bargain. The proof was the rise.  
Principle of stock manipulation to put up a stock in order to sell it. But you don't sell in bulk on the advance. You can't. The big selling is done on the way down from the top.
The average man sees a stock that nobody wanted at twelve dollars or fourteen dollars a share suddenly advance to thirty—which surely is the top— until it rises to fifty. That is absolutely the end of the rise. Then it goes to sixty; to seventy; to seventy-five. It then becomes a certainty that this stock, which a few weeks ago was selling for less than fifteen, can't go any higher. But it goes to eighty; and to eighty-five . Whereupon the average man, who never thinks of values but of prices, and is not governed in his actions by conditions but by fears, takes the easiest way— he stops thinking that there must be a limit to the advances. That is why those outsiders who are wise enough not to buy at the top make up for it by not taking profits. The big money in booms is always made first by the public— on paper. And it remains on paper.
It is an old device in Wall Street - to change the color of the certificates in order to make them more valuable.
If insiders don't buy their own stock on recessions, who should? The absence of inside support is generally accepted as a pretty good bear tip.
I discovered for one thing that there was too much stock held by too few people— that is, too much for safety and far too much for comfort. if I made the stock strong and active— I could see Kane and Gordon and Wolff unloading.
The next best thing to having people buy the stock the "prominent insider" wishes to sell is to prevent people from selling the same stock when he does not wish to support or accumulate it.
The insiders knowing that trade conditions will adversely affect the company's future earnings do not dare to support that stock until the next turn for the better in the company's business. Then there will be inside buying and inside silence.
The real reason for a protracted decline is never bear raiding. When a stock keeps on going down you can bet there is something wrong with it, either with the market for it or with the company. If the decline were unjustified the stock would soon sell below its real value and that would bring in buying that would check the decline.

Sunday, January 4, 2015

Stock cycles and news

   It is common to see bad news for the underlying company whenever the stock is in down trend. Likewise it is common to see good news for the underlying company whenever the stock price is near highs or making new highs. It's almost always like that. Have you thought why it happens like that? 
There are also situations when what seems to be a bad news but the stock does not go down. Why?
   Before we start talking about these topics lets also remind ourself that on the market 95% or so people are loosing money and 5% are more or less steadily making money.  
   It is true for every industry: majority need to pay to minority. Otherwise the system would not exist. It cannot be possible that minority would loose and the majority would gain (in $ amount). The whole town cannot consist of barbers simply because some of them will have to die or have to change profession. There simply will not be enough customers for all barbers to survive. In order for people to be successful we need to have a few barbers, a few plumbers, a few bus drivers etc. Everyone knows what happens if there are to many doctors or programmers. We've seen those days before.
    Same goes for a stock market. Majority of people HAVE to loose money in order the minority to continuously profit. 
    Now let's go back to the original question. Why bad news in the stock price bottom and good news always whenever the stock tops out? 
    General public execute their trades by following news for the underlying company or market in general. News sources like WSJ, MSNBC, Bloomberg etc. People buy on good news and sell on bad news.
    But isn't it cheaper to buy low and sell high? Yes, in fact some books even suggest you to keep on doing so.
But, let's see:
                         Low price is always when the news is bad.
                         It's always good news when the price is too high.
Seems like it's always wrong to buy low and always expensive to buy right.
Something is not right here...
   And we're coming to the main idea here. General public is fooled and have to be fooled with news releases by mass media in order for minority to live a dream life.
   So what is a logic, why they are doing so ... I mean, the news thing.
   Whenever the bad news is released - general public is selling under the influence of "highly reputable" analysts. And the minority is buying, accumulating shares. And likewise whenever they need to dump the shares - the good news are released.
   Now, how are they able to do so? Isn't is a real news we hear on TV?
   Well there could be number of ways. First of all you could just hire some dude, portray him or her as an analyst in the field of "ultra nano supa dupa particles" ... or oil and tell him or her to say something positive or negative. Is it a news, like an event news? No. But would this piece of PR influence general public? To some degree.
   How about earnings. They are the real thing right, an indication of company results in last quarter or year. How can we play with that data? Well, earnings are an accounting. And you certainly can play with accounting. If your profits are good, but you need a earnings release to sound bad you could invest some cash in R&D or buyout some company, pay bonuses to executives etc. As a result of these activities your end of quarter cash pile will dry up or even turn negative. "Holly molly, this company is in debt, I need to get out, now!"
   We will continue this topic.

Tuesday, July 22, 2014

Can you see the BIG PICTURE: Part 2

  NEWS EVENTS

  Today I would like to continue the topic of seeing the BIG PICTURE by talking about "news events". 
  There are different types of "news events" in the life of the company's stock.
  Those of you who trade stocks most likely are familiar with such event as Upgrade/Downgrade of the company. Usually it's a press release by well known rating agency. Most famous are Moody's, S&P, Fitch, Morgan Stanley, JP Morgan, Goldman Sacks, UBS, Deutsche Bank, Bank of America, Jefferies. 
  There are also less known agencies which come out from the silence once in a while to issue report on some non-popular stock. These agencies usually specialize on sketchy penny stock. A lot of you know these stocks as pump&dumps. 
  Upgrades/Downgrades usually swing between:
  • strong sell
  • sell
  • hold
  • buy
  • strong buy
Every agency has it's own scale but general idea of the scaling stays the same.
  Another "news event" for a stock is quarterly and annual Earnings Releases. It's a press release which describes of how did the company do financially in last quarter/year. Also it gives comparison for actual earning per share with:
  • "the street estimate" 
  •  same period of previous year
Estimate is made by same agencies we've talked about when talking about upgrades/downgrades. Usually this data is published by PR Newswire.
  Another "news event" would be some sort of an article or blog post by some sort of analyst. Among the most famous and influential websites are bloomberg.com, marketwatch.com, thestreet.com, wsj.com SeekingAlpha.com, MontleyFool.com, Zacks.com, theflyonthewall.com.
  Another "news" event for the stock would be positive/negative mentioning about the company on TV show or radio. Here TV channels by CNBC ans Bloomberg are major players. "Mad money" hosted by Jim Cramer is a very popular show. Good example of such company mentioning was today's Bill Ackman's talk about HerbaLife (NYSE:HLF).

  News about insider buying/selling could be also treated as company "news event". Insiders are people who directly work for the company and occupying senior roles such as CEO, COO, CFO, CTO.

  Once we know now about all these company "news events" lets talk about...why are these news are available to the public.
  Every year rating agencies spend millions on company's business research. But somehow they are being so generous and give away results of these studies to the general public...for free. In did, we can hear from TV screens and read in news papers that "Goldman downgrades Ford" and "JP Morgan is optimistic on AIG future". 
  Why they give average Joe such a valuable results of their research? Or is it valuable...Hmmmm
Let's see....
Bellow are screenshots of the chart of CRM and history of rating updates:




On this day company release what seems like a great Earnings Release. As we see from screenshot #2 at least 8 different rating agencies issued reiterated buy or strong buy rating and increased their targets.
   And as we see that was the exact day when everything started to fall apart for this stock. Do you think that this is a simple coincidence? Take a look on the increased volume that day. 
  ...wall street was aggressively selling shares to fly-high optimistic crowd. 

To be continue...

P.S.
 remember and think about "Apple will hit $1000", "Facebook IPO disapointment"....and pay attention to GPRO news-chart development.


Sunday, May 4, 2014

Can you see The BIG PICTURE? part 1

   Hey everyone.
It's been a while since I posted anything on my blog. Well, quality is betters then quantity.
   Today I would like to talk about seeing the big picture. What is it?
Have you ever thought about how big institutions keep their doors open when economy is good or bad? Recessions, high unemployment, trade deficit...etc.
But "they" seems to be doing just fine. No one going out of business. How do they do that? ....
We about to find out!
   There are different types of institutions. Let's call them "lazy" and "aggressive" ones.
 First type's model looks very simple:

  1.  You spread the word in mass media that everyone should be invested in stock market, stock market is a way to go, Joe! Notice all of your friends talking "I own this, I own that, my friend is fully invested in this biotech" etc. So we can agree that institutions are very successful on this task.
  2.  You create ways for ordinary and extraordinary people to participate in the stock market. By providing trading services. You open trading accounts, you encourage people to trade. You get trading commissions, platform fees etc. If they feel scared to trade by them selves (not totally dumb people, some thinking still happens), you offer them to "manage" their capital for a fee by "one of our professional account managers". Usually it's about 3% annual from sum under "management".  Notice I put these words in a quotes. 

 Second type's model looks much more complex:

  1. You look into ways to attract a lot of capital. A LOT. 
  2. You find your "target" stock, sometimes even a sector. 
  3. You create from "negative" to "very negative" news environment for a stock.
  4. You start to buy shares. You maintain "negative" news background, some level of uncertainty for the company's future. 
  5. After you have bought A LOT of shares you start to paint green days on a daily chart, draw well known "long-patterns" to catch traders attention. At this point we are targeting successful traders, momentum traders. Those who are able to recognize good opportunity at early stages. 
  6. As the stock progresses, at this stage our job is to gradually change news environment from bad to OK.
  7. After a stock went 100%+ from our average price (depending on features of a stock) we are ready to unload our shares. At this point you can be sure that all major blogs, all major market portals, all yahoo message boards, all forums, all financial TV and radio shows will be screaming that finally we found a greatest stock of all. We can read/hear/see upgrades made by "reliable" (and sometimes they are very well known) rating agencies, target raises etc.
  8. Job is done. "Well done bro! Let's call hookers and celebrate, grab cocaine bro! Lets buy another private airplane! No, no...let's buy a country! Which one, which on?!! :-/  Fuck, I don't know... Emmm, let's buy Ukraine! I heard it's on sale now."
  9. And your average Joe start to realize that he has bought a top, as always...Just a bad luck, right? "Next time I might get more lucky."

   Sometimes I wonder who are getting paid for news pump more: Jim Cramer or Seekingalpha.com.

 to be continued...

Have a great weekend.