STI shows relative strength

The STI exhibited relative strength today, declining 0.44%, even as the HSE crashed 2.59%.  Closing at 2,757.14 keeps the STI within its uptrend channel.

Genting SP held its ground amid a high volume sell off which pushed its price to touch an intra day low of 90c.  Closing at 94c, it's only 1c lower than yesterday's close.  The decline's rapid pace has been thwarted for now.  Almost a black hammer, there is a chance of a rebound next week for this counter.  Resistance is at $1.01, provided by the 38.2% Fibo line.  I see a stronger resistance at $1.04, a candlestick support turned resistance.  It is also the 50% Fibo line.  Any such rebound is an opportunity to reduce exposure.

AusGroup has a black candle day.  The good news is that it happened with much reduced volume.  MACD has formed a bullish crossover but being still below zero, positive momentum has not returned.  MFI has turned down which shows a slowing of buying momentum.

On the weekly chart, we have an inverted white hammer which suggests a probability of price closing higher next week.  The bugbear?  Volume is very low and this does not make any upmove in price sustainable.  A continuing rebound would allow stale bulls to reduce exposure and is likely to meet with resistance for this reason.  The weekly chart confirms that the target of 64c I have identified for AusGroup in the event of a continuing rebound is plausible.  Any long position in AusGroup taken this week is a punt at best.

With the continuing decline today, Golden Agriculture's price action has formed a lower high at 57c.  However, the pullback is on relatively lower volume which leads to a reasonable suggestion that any decline will not be severe.  Having said this, the lack of buying momentum could see the counter drifting lower.  Critical support remains at 50c thereabouts.  It will most likely hold as the rising 100dMA reaches 49c today.  I continue to like the company's fundamentals and will accumulate at supports.

Genting SP: How low could it go?

I was going through my blog's statistics and found a jump in readership for a post on Genting SP I did in early January.  Of course, that post is outdated by now since it was a TA on the counter.  I looked at Genting SP and discovered the reason for the renewed interest.  The counter is crashing through all supports, including the longer term 200dMA at 97.5c! Intrigued, I decided to take a look at how low this counter might go.

From the plunging OBV, it is quite obvious that distribution is taking place big time.  The counter closed at 95c today, down 7c, on much higher volume.  The MACD showed a sell signal yesterday and this signal was confirmed today.  The MFI is still hovering at the 40% level and is far from being oversold.  All these suggest that there is more downside for this counter and shortists are having a field day here.

38.2% Fibo line at 91c might provide some near term support.  If this breaks, the 23.6% Fibo line is at 81c and the rising 100wMA is at 73.5c.  I rather doubt that price action would descend to the 100wMA in a hurry but one never knows.

I have mentioned before that I do not like the fundamentals of Genting SP and consequently, I was never vested.  However, technically, it is now looking interesting.  I would keep an eye on the MFI and if it enters the oversold territory, it might provide an opportunity to go long.

STI, AusGroup, Golden Agriculture and Healthway Medical

STI closed at 2,769.19, down 24.87 points.  It is still within the uptrend channel and above its 100dMA.  Volume is somewhat reduced and the downwards adjustment in the index is nothing alarming at this stage.

AusGroup looks interesting as volume continues to expand for a second day with price moving up to close at 58c today.  MFI is rising strongly and is almost at 50%.  MACD turned up and a bullish crossover with the signal line seems inevitable.  Currently, the declining 20dMA is providing resistance at 59.5c.  If the price action overcomes this, it could move to 64c which is the resistance provided by the 50% Fibo line.  This is also the price level which the descending 50dMA seems on track to meet in the next few sessions.

Golden Agriculture experienced a down day closing at 55c on the back of reduced volume.  MACD is poised to cross above zero which would herald the return of positive momentum.  Gap support at 54c.  My target price for this counter remains unchanged at 59c if the upmove should continue in the near term.

Healthway Medical's price action formed a gravestone doji today.  This is a bearish candlestick. With the MFI and MACD turned up, the expectation is for some continuing push upwards but these momentum oscillators are lagging indicators.  So, we have to take this with a pinch of salt.  If price action does not close above the resistance provided by the descending 20dMA at 15.5c, we want to at least see the rising 50dMA confirmed as a support at 14.5c.  All we can do is to wait and see.

A rebound or something more lasting?

A reader, CT, posed some questions in response to my post yesterday:

"i was wondering why u would reduce ur exposure at this point in Goldenagri and STI. do u think that there will be another correction soon? or are u just afraid of high volatility? could u expand ur thoughts on that? i ask because it seems to me that after this correction, the entire mkt seems poised for a steady uptick."

The STI broke the uptrend channel's support on 5 Feb before re-joining the channel on 9 Feb.  Of note is that the support broke on very high volume while rejoining the channel took place on relatively lower volume.  This is more bearish than bullish.  Incidentally, the support broke on the same day that the declining 20dMA formed a dead cross with the 50dMA.  The declining 20dMA seems poised to form another dead cross, this time with the 100dMA.  The 50dMA has stopped rising and is drifting lower.  The 200dMA is still rising strongly and should provide a stronger support at about 2600 points.  All these do not mean that the STI is going to crash to the 200dMA but it does indicate more weakness.

In the near term, the MFI is rising and this indicates positive buying momentum.  The MACD has risen above the signal line which is a positive as well.  There is probably some room to move up as the MFI is far from being overbought.  However, keep an eye on volume as without any meaningful expansion in trading volume, the upmove in the STI is likely to be no more than a technical rebound.

Yesterday, while chatting with LP in his blog, Bully the Bear, he mentioned that he is vested in SGX.  I took a quick look at the chart as I was curious and saw SGX clearly in a downtrending channel.  In such a situation, the probability of a counter forming lower highs and lower lows is higher.  It would be prudent to reduce exposure if the price moves to retest the channel resistance.  I mention this as a quick reminder becaue if the charts of counters you are vested in show a similar trending, you might want take this into consideration.

As for Golden Agriculture, I am just doing what I have always done.  As price moves up, I divest gradually at every resistance level.  I hedge against the risk of any sudden reversal in such an instance but I will also never maximise my returns.  Given that the market usually lapses into a stupor after the Chinese New Year period, I am not optimistic that the recent high of 65.5c could be bested.  If you look at the chart, 62c was a resistance level in August 2008 which sealed the fate of this counter as the price plunged after that.  That it was punctured for a couple of days last month in January was a positive but it happened too soon.  59c is a many times tested resistance in recent memory and is psychologically more important.  Hence, I have chosen it as a more realistic target price this time round.  The important thing is to make money.  Greed is not a bad thing but beyond a point, it is.

TA cannot predict what will happen for sure in future.  It simply gives us clues and we can choose to be conservative and wait for confirmation before acting or hedge to reduce risk (which could also reduce rewards).  I have a preference for hedging as I am not a pure TA practitioner.

A very quick look

Very, very tired from a long journey back to Singapore.  Need to sleep.  Yawn.  I have just replied to four comments from readers and I could barely keep my eyes open now.  So, this is going to be a very quick look.

STI is up 35 points on respectable volume.  I expect the index to continue gaining for a bit more.  This is probably a good chance for stale bulls to reduce exposure.  I wouldn't be adding to my positions except for those in counters which remain promising (read limited downside and good upside potential).

Golden Agriculture is pushing higher as expected.  I have divested some as a hedge, gaining 10% in the process.  If you followed my posts on this counter, you would remember that I have a target price of 59c for the upmove this time round.  This remains unchanged.  MFI has just risen above 50% and is a long way from being overbought.

Healthway Medical confirmed the buy signal we saw on the MACD in the last trading session of the Year of the Ox.  You might remember we talked about this in my last post on Healthway Medical as well.  Immediate resistance is at 15.5c, the 20dMA.  Continuing upmove in price could see the XR high of 18.5c tested once more.  Volume needs to expand more meaningfully for any upmove to have a more lasting impact.

Saizen REIT has no movement and I hope to collect more at 15.5c thereabouts.  This REIT, I believe, is a sleeping giant.

OK, would like to blog more but need sleep....  zzzz...

Fundamental Analysis: The Cash Flow Statement

Cash Flow Statement quite obviously describes whether cash is flowing in or out of a company.  There are three sections.  

Firstly, Cash Flow from Operations.  

Secondly,  Cash Flow from Investments.  

Lastly, Cash Flow from Financing Activities.




Cash Flow from Operations is an aggregate of Net Income and any depreciation or amortisation put back.  

Depreciation and amortisation represent money which was spent years ago and must be added back to give us an accurate picture of the company's Cash Flow from Operations.  

Here, not only do we want to see a positive cash flow, the higher the cash flow, the better.

Next, we examine Cash Flow from Investments.  

Businesses make investments in income producing assets such as production equipment.  

Any money spent making such investments are labelled Capital Expenditures (CAPEX).  

It is also possible for companies to sell such investments and we might therefore get a positive figure under Others.  

However, here, cash flow is usually a negative figure.  

Companies which consistently have very high CAPEX should show that they are able to fund this through internal resources as far as possible and that they should be able to generate higher returns on such expenditures.




Lastly, we look at Cash Flow from Financing Activities.  

Money used in the payment of dividends or in the buy back of shares results in negative cash flow.  

Shareholders like dividend payouts.  They also like to see the value of their shares rising which happens when a company does a share buy back.  

So, negative cash flow here is actually good for shareholders.

Money gained from selling new shares or issuing bonds provides positive cash flow.  Here, again, we get a bit of a twist.  




The company might get positive cash flow through the issuance of new shares or bonds but it is actually bad for the shareholders as their shareholdings are diluted and bonds have to be repaid with interest.  

Unless the company is able to demonstrate that it will be able to use the funds raised to increase value for its shareholders, it has to be looked at most cautiously.

This post ends the quick introduction to Fundamental Analysis which I set out to blog starting with The Income Statement and followed by the Balance Sheet.  




I hope you have found these posts informative and if you are not already doing FA, I hope these have made you interested enough to look into the subject in greater detail.

I will be going away for a short holiday over the next few days with my family and will return mid week.  I wish everyone the very best and I will talk to you again soon.

Related posts:
1. Fundamental Analysis: The Income Statement.
2. Fundamental Analysis: Balance Sheet.
3. Why is Warren Buffet the world's greatest money maker?

Fundamental Analysis: Balance Sheet

A company's balance sheet is a record of its assets and liabilities.  

Basically, if we look at how much the assets are worth and deduct the total value of the liabilities, we will arrive at the net worth of the company.  

Net worth or the book value of the company is also known as shareholders' equity.

Under assets, first, we see Current Assets.  

Current Assets are cash and other assets which can be converted into cash within a very short time.  

Usually, they are listed in the balance sheet in order of liquidity with cash being the first item as it is the most liquid.  

Secondly, we have Non-current Assets.  These are assets which cannot be converted into cash within a very short time.

One thing that value investors look out for is how much cash and cash equivalents a company has.  

Having a lot of cash is usually a sign of strength.  

The company will have the ability to seize business opportunities and will be able to go over rough patches in the business cycle relatively intact.

Next on the list is inventory or the goods which are in the company's warehouse which it sells to customers.  

In business, we say that we cannot do business with an empty wagon.  

Our wagon has to be stocked and that's our inventory.  

However, we do not want our wagon to be overstocked as well.  

Goods also run the risk of becoming obsolete in many cases.




Accounts Receivables is next.  

When the company sells goods to its customers, very often, the customers are given credit terms.  

In businesses which have a strong retail bias, this might be a very small amount if it exists at all since they collect cash for all their sales.  

We want to keep an eye on this because if most of a company's Current Assets are in Accounts Receivables, we have to question the financial health of its customers and how long does it usually take before payments are made.

Prepaid Expenses or payment in advance is next.  I like this because it shows that customers are willing to pay in advance before they receive the goods.  

It shows that the company's products are in demand and, probably, cannot be replicated or very difficult to replicate by its competitors.  The company has a competitive advantage.




Next, we move on to Non-current Assets.  Companies might own properties, vehicles and production equipment.  

Vehicles and production equipment will depreciate in time and the value we see in this line is the total value at the time the balance sheet was prepared minus depreciation.

Then, we have goodwill.  This is something which has been discussed in the case of Healthway Medical.  

This number appears when a company buys over another company at a price above the latter's book value.  

The value above the book value ends up as goodwill in the former's balance sheet.




This is followed by other intangible assets which cover copyrights, patents, trademarks and so on.  

Only intangible assets bought from another company can be reflected in a company's balance sheet.

Both goodwill and other intangible assets must be amortised over time if they have a finite life.  

If they are not depreciating in value over time, then, they need not be amortised.

Long Term Investments are next.  This shows any investments a company might have made which have durations of longer than a year.  

We will have to dwell on this a bit more to see what kind of investments have been made here as and when it occurs.  

It will differ from case to case but generally, we want to see that these are investments which generate higher returns for the company.




An important ratio we use in fundamental analysis is Return on Assets (ROA).  

This is a measure of the level of efficiency in which a company utilises its total assets.  

If we take net earnings and divide this by total assets, we get a figure in percentage terms.  The higher the better.

We move on to Liabilities and just like Assets, there are Current and Non-current forms.  

First off under Current Liabilities, we have Accounts Payable which is money owed to suppliers for goods and services provided.

Then, we have Short Term Debt or Debt which is due.  If a company has a lot of Short Term Debt, this could be dangerous in times when credit is suddenly difficult to come by.




To calculate the financial health of a company, analysts employ the Current Ratio which divides the total Current Assets by the total Current Liabilities.  

So, you can imagine that if you have more of the former and less of the latter, it's a good thing.  A more stringent ratio is the Quick Ratio and it measures a company's ability to meet its short term obligations using its Current Assets minus Inventory.  Any ratio value of more than 1 is good.

Under Non-current Liabilities, we have Long Term Debts and so on.  

I guess the important thing to say here is that very strong and long established companies which generate healthy cash flow usually have very little debt.




I think it is common sense that we want to see as little debt as possible in a company's balance sheet but debt is sometimes a necessary evil.  

So, we have to evaluate debt on a case by case basis.

I hope this quick introduction to what is a Balance Sheet and how to use certain ratios to determine the health of a company is useful.  Next post will be about the Cash Flow Statement.

Related posts:
1. Fundamental Analysis: The Income Statement.
2. Recommended books for Fundamental Analysis.

Fundamental Analysis: The Income Statement

Every trading day would see me looking at charts in the evening and looking out for pertinent news which might have an impact on my investments.  

On weekends, I would sometimes blog about my personal experience and some ideas which I might have about investments.  

The Chinese New Year long weekend is giving all of us a much needed break from trading. Take some time to smell the flowers, so to speak.

I have decided that I will blog about different aspects of FA and this will probably spread over a few posts to make it more manageable.  

My formal education in Economics and Business Administration, specifically, Financial Management help to inform my FA.  

Of course, these are textbook material and I try to keep myself up to date by reading weekly periodicals such as Newsweek and The EDGE.  

I also read analysts' reports, not to blindly follow buy or sell calls but more as an idea generating exercise.  

Being in business development also gives me an inside feel of the business climate especially in South East Asia where the company I work for has the greatest exposure.




In an earlier post, I said that FA could be done on many levels but the most basic level would be looking at a company's financial numbers.  

I have learnt much to my own regret that to overlook this for any reason (usually due to complacency) could be a big mistake.

What is an Income Statement?  

This basically tells us how a company's operations performed over a period of time.  




Right at the top is the gross revenue (GR) the company has generated.  In a company that deals with goods, you will have to deduct the cost of goods to arrive at the gross profit or GP.  

For people who are in tune with Warren Buffet's investment philosophy, you would remember that he says we should always look for companies with GPs of no less than 20%.  In fact, he consistently targets companies with GPs of 40% or higher.

So, let us say that a company has a gross revenue of S$100,000 and their cost of goods is S$60,000.  Gross profit is S$40,000.  

As a percentage, the GP is S$40,000(GP)/S$100,000(GR) = 40%.  

Simple enough.




Does this mean that everytime we see businesses which generate a GP of 40% or more, it is a good buy?  

No, we continue by looking at the next part of the Income Statement which shows the operating expenses.  

These are the Selling, General and Administration expenses or what is referred to as SGA, the Research and Development (R&D) expenses and Depreciation.  

Upon taking out all these expenses, we arrive at the Operating Profit or Loss of the company.  




As you can probably tell, a company which incurs massive expenses despite a high GP is not going to have much left for the shareholders.

The next part is the Interest Expense, Gains or Losses from sale of assets and Others.  

Taking all these out give us the Income of the company before tax. 

We want to make sure that the company is not borrowing too much and not paying too much for its borrowings.  This is what is known as leverage.  

There are many companies which are heavily leveraged and as long as they are making more money than the interest they are serving on their loans, they look good but if the tide turns and, in the last financial crisis, we saw how quickly they could turn, things could become very ugly.  

So, imagine if revenue dries up during a recession and the interest expense remains high, not a pretty picture. 




Having said this, leveraging is not all bad.  Credit is said to be the lifeblood of businesses.  Few businesses in this world operate with zero leveraging.  

As long as it is kept at a level that is manageable, a level that will not threaten the viability of the company in the worst case scenario, it is acceptable.  This is what is called stress testing.

The next part of the Income Statement would be the taxes paid.  

Once this is taken out, we have the net earnings of the company.




I hope you have found this post to be informative and I will blog about the Balance Sheet and Cash Flow Statement in upcoming posts.

Related posts:
Identifying trends and value: FA and TA
Determining the impact of news on specific companies.
Monitoring our stocks.