Friday, July 20, 2012

Aqumin Volatility Newsletter 07/20/2011 $EDU

Chinese Takeout (or takedown as the case maybe)

The market might be entering the new post-Euro muddle phase. News today of some Spanish Bank help and bondholder haircuts hit as the markets were just starting to enjoy a lift from better than expected earnings this week. Having bond holders take some pain is the best path to recovery since markets have to stop going down before they go up again. The US housing market is showing the way there. It was painful but necessary. Mostly the markets are going to oscillate between so-so good news and bad news until the elections when the volatility will pick up again. It is time to look at some outlier movement.

Below is the one week momentum landscape I use to look for trending movement in AlphaVision™ for Bloomberg. This landscape shows 1 week total return against the difference between 10 Day Historical Volatility and 30 Day Historical volatility. The clear loser for the week in its group was EDU.

7-20-2012 10-48-00 AM

Several, if not many, US listed Chinese companies have had accounting issues. It might be the Wild West over there when it comes to accounting or maybe the Wild East. Either way with an SEC investigation the shares plummeted and the implied volatility hit the roof, which should put a lid on a share bounce. No doubt there will be a cloud over the company for a while. It looks like a butterfly set up to sell the volatility is not a bad idea while things shake out.

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