Monday, October 18, 2010

Dis(cussing) RINO International

"...On the other hand, after an extensive advance which finally spreads to issues neglected all throughout the bull market, belated individual strength and activity not only are likely to be short-lived but may actually suggest the end of the general recovery, especially if the early leaders begin to show no further response."

The Battle for Investment Survival; G.M. Loeb, 1935

We're seeing plenty of laggards come to life lately and plenty of bullish chatter on such issues; based largely on technical positives, such as stocks breaking above moving averages, upside break-outs of lengthy (though low-level in these cases) consolidations and/or price-breaks above obvious resistance points.

Coincident to the late-to-the-party cheerful rush, is a rather uncomfortable numbers of previous leaders stalling or turning lower (Cloud-based technology leaders, Semiconductors, etc.). Not every leader has stopped rising, but enough of the early leadership has stalled now to raise concerns (especially in terms of relative-strength), while general sentiment of investors have seen an increase of optimism.

And while some of these laggards coming to life will represent good, quick trades long, the risk vs. reward here resembles the classic image of picking up rolls of nickels in front of steam rollers. They may work more often than not (shorter-term), but the fundamental reason for longer-term under-performance could surface at any time (flattening traders grotesquely). I am personally looking at which to short instead.

RINO International, a Chinese company listed only in the US (i.e., it does not trade in its home country China, like so many Chinese names on Nasdaq), is a former leader and broke above its 200-day MA today after breaking through earlier resistance last week. There are a lot of traders getting involved, as RINO's near-term technicals suggest higher prices ahead.

While I won't recommend getting short RINO, I will go out of the way to recommend staying away from the long-side. I am short RINO, as of this afternoon, but not very much and not in all accounts. This is a difficult stock to borrow; I've taken what I can for now in case nothing further shows up. I'd rather wait for the first sign of failure, but will take it day to day and see what is available and how the name continues to perform.

RINO was a staunch leader as a younger IPO last year and I was trading (the beast!) aggressively (long) along the way. Like a lot of IPOs, I've learned to walk away once the first top is confirmed, since so many never really come back (love 'em and leave 'em!) [EDIT: I should stop calling this an IPO from last year - it existed earlier, but as a penny stock with minute trading volume]. This was basically the pattern RINO demonstrated, as the stock traded essentially lower-only for six ugly months (from 35 to 11). RINO then consolidated consolidated sideways and is arriving late now to this year's equity party. FWIW, the stock still needs to rise another 95% to reach the high posted last December.

RINO has an incredible short interest. Over 50% of RINO float is short (>16.5% total shares outstanding). This may seem a positive to some of the enthusiastic traders on RINO today, since a high short interest could create a squeeze. But when shorts get this aggressive they do tend to be right (they are more sophisticated traders, for one thing and large shorts do large amounts of homework on the fundamentals. Names with heavy short interest tend to prove shorts correct in the end; it is a matter of when and it is not prudent to take them on with the other side). While 16.5% (outstanding) is not incredibly high, the >50% float is truly exceptional.

Of further concern is the recent pattern (beginning late summer) of Chinese companies listed only in the US blowing up with accounting scandals, fired auditors, resigning CFOs, etc. We have gone a few years without seeing much of this and then we saw a half-dozen of them in just a couple of weeks. Would you be surprised to learn that the accounting standards on these names is commonly slack?

Finally, click on the chart below and focus on the relative strength (RS) line, now at 26. Even though RINO has had a break-out and a nice run, the RS is still below the previous 17.06 high (in other words, RS is negatively diverging). I love buying breakouts when RS precedes price and I prefer avoiding or else shorting a breakout when there is a defined negative divergence in RS instead.

RINO may go higher and this post is not to say it cannot. But the name is a former leader and current question mark now at best.

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