Some trading ideas for a traders' market


IF day traders were to gather after work for a drink and to exchange views on the stock market, it'd be a fair bet that much of their conversation would focus on the current rotational punting of small-cap stocks and the best ways to exploit this. For instance, the conversation might centre on searching out new, low-priced warrants on underlying stocks that are significantly off their highs or are just off their lows.

Or maybe they'd talk about the stocks which have been quietly creeping up to new highs and the merits of chasing such counters ever-higher. Some might even discuss a relatively simple approach to stock-picking, namely choosing those recent IPOs which have a decent story but have slumped below their issue prices. In a similar vein, traders would also probably exchange ideas on small, promising stocks that are only just coming off their lows.

If such a discussion were to include new warrants, a likely candidate might be the Federal International 2007 instrument. This was issued when the underlying stock was bashed from a high of around 70 cents last February to around 30 cents at the end of last year - something that wouldn't have escaped the attention of sharp-eyed day traders. When it listed last month, the warrant sank to a low of 12.5 cents. It now costs 18.5 cents - nearly a 50 per cent rise in three weeks. The shares in the meantime, have bounced off their 29 cents low to about 37 cents now.

It could be that interest in the company is stirring again after it announced two joint ventures last month via its wholly-owned subsidiary Alton International, with partners in Indonesia and Brunei.

Is there any upside left in the warrant? Its exercise price of 22 cents means the conversion premium is a modest 9.5 per cent while gearing is an average two times, figures that are not overly taxing. If the oil and gas sector swings back into play, Federal's warrant could be the best way to enjoy a geared exposure. Note, however, that expiry is in three years and not the more typical five.

Any conversation about stocks that have risen unnoticed to new highs has to include FibreChem Technologies, which now sells for an all-time high of 68 cents. Having cost just 31 cents last Aug, what might some of the reasons be for a 100 per cent gain in four months?

Apart from expansion in China, perhaps the most significant development surrounding FibreChem recently was the entrance of fund managers NewSmith Asset Management last October at an effective cost of 42 cents per share.

The deal between NewSmith and FibreChem seeks to raise $25 million for the latter, dependent on FibreChem hitting certain pre-specified profit targets. It could be that the market believes this to be likely, hence the solid price rise.

Is there value in chasing FibreChem any higher? Possibly - anecdotal evidence from traders is that there is strong support almost every day for this counter, though much of course depends on whether the company really meets its profit targets.

What about battered yet promising IPOs? If such a discussion were to take place among traders, it must involve China Paper, which was offered last July at 36.5 cents but has never crossed this mark. It currently trades for 32.5 cents.

Recall that China Paper was rated by Standard and Poor's Equity Research to be worth around 52 cents just after its listing, so clearly, this is one counter with a lot of catching up to do.

Last but not least is MultiVision Intelligence Surveillance, which makes video surveillance equipment. This counter has progressively collapsed from 37 cents a year ago to 16.5 cents now, but is now showing signs of life, having climbed off its floor of 13.5 cents last November.

It traded a hefty 14 million shares on Tuesday, always a good sign to those who believe in the old market adage 'volume always precedes price'. Was there some quiet accumulation of the stock on that day? Only time will tell.


So there you have it - what traders probably talk about over lunch or after work. Of course, such banter would also question the sustainability of the small-cap interest, especially since a significant portion of volume is being generated in-house. Also, there's the spectre of rising US inflation/interest rates to contend with and a weakening Wall Street which could deter full-scale retail participation.

Without the retail public's entry, a long-lived small-cap rally is a dubious prospect - and most traders know this. For now though, there's always that other old adage to cling on to - 'make hay while the sun shines' (or should that be 'the trend is your friend, until it bends'?).

《The Business Times》


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