Chart 1 - Yanzhou Coal ADR (NYSE: YZC)
Yanzhou Coal (ADR: YZC) is one of the best Chinese stocks to be in a trader's arsenal. Although more richly valued than China Southern (ADR: ZNH), which has a still very reasonable PE of 42, there is similar institutional accumulation, which I mentioned in my previous post.
With less than 100 million shares floating and a market cap of almost $10 billion, institutional investors are engaged in a long term, macro accumulation of Yanzhou Coal. Because of the propensity to gap due to overnight trading in Asia, traders are wise to buy into multiple days of weakness. My preference with Yanzhou Coal is to buy on the third day of weakness, preferably into the close. But how often do we get “ideal situations” for any trade?
The point, especially in global macro strategies but in any long term trade, is to accumulate the stock on weakness, and a general rule is to start buying when the stock is offered 10% below the previous three day high if you are accumulating this stock with a long-term view, which shouldn’t preclude you from trading around your position nevertheless. In fact, global macro strategies need to juice their returns whenever possible. By capturing short-term volatility through the constant adjusting of position size, global macro traders will often be positioned very aggressively into a move like this and will then trade into this type of volatility with the objective of cutting position size temporarily.
For you fanatic stat arb traders, I know you hate hearing references to non evidence-based technical analysis but this little strategy picked up from my days trading the tape, allows you to have the safety of the momentum behind you and if a snap back rally fails to make a new high, you can bail with at least a small profit. It’s the poor man’s way of creating a “backstop” to his trading position, but it works.
In the case of this Chinese stock, Yanzhou Coal has PE of 31 and pays a dividend of 78 cents/share. You have an upward pointing chart with significant visible bid support, a dividend and single digit institutional ownership. So for the small fry, the 128000 share daily volume is of no concern, especially if you can trade the volatility in this Chinese stock. And a failure to close below $100 after an intraday low to $98 also tells me there are likely to be more than a few bears feeling trapped if this opens strong.
I am definitely going to keep an eye on this one over the next few days to see how this shakeout plays itself out. I like this stock at these valuations, especially with the backstop of the falling dollar.