Hitting the Pinnacle

What a week it has been for technology and hardware equipment supplier Pinnacle Technology. The company, which share price has received a drubbing from shareholders, released a statement on Tuesday this week in which they said one of their executive directors had been charged and arrested earlier in the month on allegations of bribery.

For those of you who haven’t heard about the story I’ll briefly summarize it. Mr Takalani Tshivhase is alleged to have tried to solicit a bribe to a senior police official to secure a contract with South African Police Services.  Although Mr Tshivhase has been released on bail and awaiting to go on trial which is scheduled for the 24th April 2014, questions have been raised relating to the sale of shares by Mr Tshivhase prior to the disclosure to shareholders of his arrest.  Mr Tshivhase was arrested on the 5th March 2014 yet the company only disclosed this on the 25th March 2014 together with the fact that he was allowed to dispose of R4 Million worth of shareholding on the 19th March 2014.

Outcries of insider trading has drawn sharp criticism on the company’s top management, however management has stepped forward to deny such claims. Obviously at this time we are unable to ascertain the truth as we need time for a proper investigation to determine why the events which took place were allowed and if they fall in line with the rule and regulations of the JSE.

However today's article is not about speculating what the possible outcomes could be but rather a case study in point of how transparency affects the confidence of investors and the role the exchange operator plays in ensuring fair and competent reporting to shareholders.

It is important to note that we are not talking about the shorter term effects but rather the longer term effects. The reason for this is that we find that traders tend to create a lot of “noise” or volatility in the market on day to day occasions. On the counter investors hold for longer periods, so although traders have the ability to pullback a price, at an appropriate price level we find investors who will step in and hold the price at a rational level and provide the vital stability.

This stability creates the right environment for both traders and investors to create value at buying points. Think of it this way, if a particular stock was trending upwards, traders would drive the price to a level which might be seen as overbought causing a reactive impulse to sell down. However investors who are more fundamental based rather than technical based will step in at a low point which is higher than the previous low if they feel that sentiment might change in the near future. The volume at which investors wish to enter is much larger than the traders and will thus give sustenance to the stock and allow its price to rise in the long term. 

The opposite would happen at selling points, where a particular stock will begin its trend in downwards direction; perhaps spurred on by investors who are becoming aware of changing economic situations and potentially a change in direction of trend.  Traders will be on the lookout for increasing volumes as indications of sellers’ strength. Once it begins to kick in the selling frenzy begins and continues until extreme points are once again met. This is where the traders step in for a quick retracement. The investors who missed the boat on the last selloff are waiting with bated breath for the next chance to offload. They find this opportune moment to sell into strength; again with volumes much larger than the trader’s which gives the stock price impetus to drive lower thus creating value for the short side trader.

How does this all relate to the above case of Pinnacle Technology? It’s quite simply, by the company not disclosing information promptly, it has effectively created pandemonium in the movement of the share price.

Investors adapt to new information as it becomes present, but in the case above the information has been held back. The primary information is quite damaging but it’s the process whereby the board neglected to disclose information in timeous manner which has such material effect.  What has been left behind is a cloud of smoke and an inability to establish the reliability of any further information presented. This results in a more speculative stance on the part of investor which exacerbates the downward pressure on the price.

Traders try to establish a resting point through all the wild fluctuated movements. Traders in their very nature are most adapted for volatility, but the tables have turned and now it is the investors who are creating the volatility. This volatility creates a large confusion around price discovery. Traders who think they landed a bargain end up being thrown out by bouts of vicious volatility. The result of this is a destructive value mechanism rather than a value creator.

We can see the damaging effects a lack of transparency has on investor confidence. A healthy stock exchange is one in which it prides itself in openness and fairness. This leads me to my next point of how the exchange operator has a role to play in bringing investor confidence to market.

The most important participant on an exchange is the public as they are the source of capital. Without their participation there would be no market. However the public shareholder is always the last to receive information which puts them at a disadvantaged position. This is where the exchange comes in and plays the role of custodian of shareholders rights. The exchange has the ability to govern strict rules and ensure that all companies comply thus providing the public with a sense of security.

Non-compliance should yield a company a suspended membership from the exchange and recourse of negligent actions. The more stringent the exchange is on its members the less the ability to disguise material effects away from the public and the more confidence the public has in the exchange. 

 What is going to be interesting in the months ahead is how the JSE deals with this particular company. It’s important from the onset that it sets the precedent as this case will be closely watched by the public to see what action is being taken against this company. The best outcome now would be for the JSE to reaffirm investor confidence and edge closer to reaching the pinnacle of transparency.

If you would like to contact me you can through my email at cadetrader@gmail.com or if you wish to follow me on twitter and get the latest updates of news, interesting commentary and general trends in the market, my twitter handle is @CadeTradeR if you follow this link it’ll take you directly to my twitter timeline: https://twitter.com/CadeTradeR

Doubt: The Truth and Nothing but the Truth

Often we are told to deal with our emotions so they don’t affect our trading process. We also know that fear and greed are the most notable emotions which traders have to deal with on a consistent basis. Although both these emotions form part of our overall state of mind, we seldom put our finger on the pulse of the minor emotions which serves as a catalyst to us feeling generally fearful or greedy. 

Today’s article deals with a focus on doubt which is the secondary emotion to fear.  Doubt can be defined as an uncertainty revolving around in your mind which grows when there is a difference between a perceived outcome of an event and the realities of the present. What this often leads to is a gap in our minds between what we expect and what really is.  This gap which is left behind needs to be filled with some sort of emotion and more often than not we find negative emotions creeping in and seemingly brings us to be fearful. 

  

In my last article I mentioned how doubt had the potential to unfold our trading plan. Traders become susceptible to doubt because trading in the short term requires a continual revision of their stance. As humans we are prone to allowing ourselves to form habits so that when we repeat an activity we expect to receive the same result each time. So what we do is become accustomed to the current market environment and flow along, expecting it to behave that way all the time. We think like this because we start believing that we have found a degree of consistency in our trading.

But the problems set in when the market environment begins to change. The edge we were once so confident of starts returning negative outcomes on more regular occasions. This is when doubt starts to set in our minds and begins to question our judgement. We begin to battle with ourselves whether the decision we made was right or wrong. This can be agonizing for a trader, until finally we succumb to fear of what happens next.

Truth be told we don’t really know what will happen next, which takes me to the next point. Doubt creates in our mind a mechanism whereby we find the need to rationalize why a certain event took place. Once we start looking for an answer, which in trading can be unlimited in possibilities, we begin to start processing information which is unnecessary. Information overload drives our mind into a state of confusion. Once we enter this stage the learning process has effectively been side lined as we are unsure of what the market is really telling us.  

We can observe from the scenario above that doubt has the ability to create so many more emotions than its own, particularly emotions which are most unwanted. How do we deal with this?

There’s 2 ways in which you can deal with this problem, either you choose to concede to the power of your emotions and allow them to continue their destructive path of eroding your precious capital or you can make it your goal to learn about your emotional responses to situations that happen, jotting down notes, compiling research and studying ways to deal with these emotions.  

You are going to encounter doubt throughout your trading journey, not only when you trading but also in your beliefs of turning it into a profitable business, this is inevitable. However your success does not depend on how brave you are or how much money you going to make but rather it’s based on your commitment to enduring the bad times as much as it is revelling in the good times because it’s in the bad times where you learn the most crucial and hardest aspects of trading and ultimately define you into the trader you want to be. 

If you would like to contact me you can through my email at cadetrader@gmail.com or if you wish to follow me on twitter and get the latest updates of news, interesting commentary and general trends in the market, my twitter handle is @CadeTradeR if you follow this link it’ll take you directly to my twitter timeline: https://twitter.com/CadeTradeR

Adjusting to Market Conditions

Who would have thought that the euphoria most traders experienced towards the end of last year as the S&P500 was marking fresh all-time highs, could possibly change course and start to behave in a very much different way to what would be expected.

 If you've been around long enough you know the feeling when a market does an about turn and changes the way it trends. First you keep reassuring yourself that you can’t win every trade, then you begin to start doubting whether your system is as full proof as you thought and finally you become frustrated as the losses you start to incur begin to eat away your hard earned profits.

There are 2 aspects which I would like to address in the paragraph above:

1. Mental capital is crucial when a market begins to change direction. If you’re not in the right frame of mind; that doubt that I was talking about starts to set in and has the possibility of unfolding your trading plan. When a market is in a phase of changing its conditions you need to be aware of the impacts those changes have on your system and whether your system remains valid in the current market environment. It doesn't help you implementing a trending system in a non-trending market; the results will simply distort your performance of your system. Which leads me to the second point:
2. Understanding that markets never trends in a straight line is important not only for your emotion well-being but for the bottom line. One aspect which I feel isn't highlighted enough is the fact that different market conditions require different systems that suit that particular condition. Being aware that the market has the ability to change its characteristics is one thing, knowing how to deal with those different characteristics is another.

My personal experience with these 2 aspects is what encouraged me to write up about them. I recall at times when the market was on a never ending trend upwards which would make my profits nice and fat, the next minute it seemed as if either someone had turned off the tap with all the lack of momentum or some unforeseen event turning the market from shiny to absolutely ugly.

I must admit that until a few months ago I only had a trending system in place and thus when the opportunity presented itself I tasked myself with finding out how I would be able to deal with these obstacles and glad to report back that I have since made progress. Although I have placed a fraction of the trades I normal take, I do believe that in the long run this recess in my trading only serves to increase my ability to trade better. 

If you would like to contact me you can send me an email at cadetrader@gmail.com or follow me on Twitter @CadeTradeR I would really enjoy hearing your stories and progress.