The other day I put on my thinking cap. And what I thought about was what China MediaExpress Holdings (OTCPK:CCME) investors are possibly thinking. On one end we have dedicated longs like Michael Anderson, who wrote a compelling, in-depth analysis on the company, tirelessly disproving recent allegations; on the other extreme end of the spectrum lies the incorrigible Muddy Waters, infamous for alluding to the fraud behind another China growth story in RINO International Corporation (OTC:RINO).
The thought process I'd like to share is similar to Weinstein's behavioral analysis of China MediaExpress Holdings. In his recent article he asks one simple question: Is the change in valuation due to a change in intrinsic value or a change in perception?
Last week 53.8 Million shares traded hands, or roughly 5X the float. This implies that some automated trading likely took place, otherwise coined 'momentum trading'. As the chart (below) shows, a move below the lower bollinger band (BB) would have created an irrational environment as the price deviated far below the 'norm' on the 3th of February.
Click to enlarge
(click to enlarge)
In such an instant, traders picked up on the signal that the decisions investors made were based on impulses (i.e. fear) and not on the basis of rational thought; shares thus recuperated some of their earlier losses by Friday.
I ask, did the company experience any fundamental change that could justify its stock price sliding from a high of $24/share on January 28th, to a low of $10.31/share four sessions later? If not, then what changed?
In a report
, Muddy Waters successfully manufactured fear among investors who hadn't the slightest idea of what they were holding. The cost of not fully understanding what you are holding is immeasurable. If I recall correctly, it is the same cost that nearly bankrupted the financial system in 2008.
Muddy Waters successfully changed unstable investors' perception of China MediaExpress Holdings (OTCPK:CCME
). And now investors believe they are due an explanation from the company.
Elsewhere, investors who have done their due
are capitalizing on an opportunity for shares at a perceived discount price. If no fundamental change has taken toll, then one is essentially given the opportunity to purchase the same shares at a discounted price.
But with both the bears and bulls more or less decided, the next few sessions will belong to the much larger group of traders and investors sitting on the sidelines, observing the chaos and lurking for opportunity.
There are 3 things I am now closely watching for (refer to the chart above).
The first and second are confidence indicators: the Relative Strength Index (RSI) moving above the '50' mark, and the volume remaining abnormal or above average. If investors aren't confident in the company, the RSI will falter and volume will plunge. Both of these are dependent on the price edging higher.
The third indicator is a trading signal. If the price moves above $14.43, or the high from last Friday's session, we're looking at an intraday 'breakout'. Again, this shifts the way investors perceive the market. If investors feel the company is being rightfully scrutinized, there will be a lack of buying in the market.
Ultimately, this entire debacle will serve a greater purpose: China MediaExpress Holdings will have the opportunity to reaffirm its validity and gain even greater confidence on the part of investors.
If, on the other hand, some of the questions raised regarding their operations are proven legitimate, we would see implications stretching well beyond the scope of the company itself, further increasing tensions in the small cap china sector.
For better or worse, however the scrutiny is resolved, it will change investors' perception of this company forever.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CCME over the next 72 hours.